GMO Woolley claims rights issues hit performance
UK- Shares of companies that launch cash-raising rights issues underperform the market by 20%, according to research by European asset manager GMO Woolley which maintains Investors who avoid companies who issue rights to reduce debt can enhance their returns.
The research, carried out by Simon Harris, GMO Woolley’s director of investment and research, looked at 3,500 UK rights issues going back to 1965, including companies that later became delisted.
It shows that the shares of rights issuing firms on average steadily underperform the market, registering a shortfall of around 20% after five years.
“The phenomenon is long-standing and consistent with rights issuing stocks underperforming in each of the decades going back to the 1960s,” says Harris. “It also applies across firms of differing size- large caps, mid caps and small caps.”
The research classified the rights issues according to motivation- issues intended to reduce debt or shore up the balance sheet, issues related to acquisitions; and issues intended to boost organic growth.
“We found that underperformance occurs regardless of the motivation,” says Harris . “The most noteworthy differences in returns are in the period leading up to the rights issue announcement. Firms that needed funds to reduce debt underperform in the prior five years while the other groups see their share prices outperform in the previous two years.”
Harris suggests that an index fund that avoided holding a systematically selected group of both recent and frequent offenders would have achieved an extra 0.5% annual return since 1970.
GMO Woolley is the UK and Continental European arm of GMO, a US global asset management group with funds under management of E27bn.