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The fund managers hit by BT's accounting scandal

Invesco Perpetual's Mark Barnett tops the list of fund managers counting the cost of BT's shock revelations about its Italian business.

 
The fund managers hit by BT's accounting scandal

Invesco Perpetual fund manager Mark Barnett tops the list of fund managers hit by BT's Italian accounting scandal, which has wiped more than £7 billion off the value of the telecommunications giant.

Barnett is a big backer of BT (BT), which is a top 10 holding in his £11.3 billion Invesco Perpetual High Income fund, £6 billion Income fund and £888 million Strategic Income fund.

The stock also has top 10 billing in his Edinburgh (EDIN ), Keystone (KIT ) and Perpetual Income and Growth (PLI ) investment trusts.

BT has been a long-term favourite of Barnett, with the stock having been the top holding in his Income fund as recently as 2015, with the manager taking some profits on his investment later that year. Neil Woodford, the manager he replaced on the High Income and Income funds, sold out of BT last year.

But Barnett is not the only high-profile manager to have been stung by BT's surprise revelation that accounting problems in its Italian division were far worse than previously thought, sparking a 20% plummet in their shares on Tuesday, their worst ever daily fall.

Adrian Frost and Nick Shenton hold 2.8% of their £6.2 billion Artemis Income fund in BT, while Nigel Thomas holds 1.2% of his £3.9 billion AXA Framlington UK Select Opportunities in the stock.

With none of those managers commenting on BT's shock news, it was left to Royal London Asset Management, which holds just under 1% of BT across its business, to express investors' disappointment.

Speaking on Tuesday, Richard Marwood (pictured), manager of the £624 million Royal London UK Growth fund, said: 'Prior to this morning's news, BT investors had been concerned about BT's large pension liabilities and the company's relationship with its regulator, Ofcom. Today's news is an unwelcome addition to those worries.

He said the accounting problems had surprised him 'on a number of counts'. 'Firstly, BT is a strong company with a relatively predictable business and so not generally prone to these kinds of warnings,' he said.

'Secondly, given the modest scale of the Italian business, the magnitude of the hit it has caused is concerning.'

BT reported that a 'complex set of improper sales, purchase, factoring and leasing transactions' in Italy would cost it £530 million, more than three times its initial £145 million estimate when the problems were first announced.

Analysts yesterday rushed to downgrade their ratings on the stock. Berenberg analyst Paul Marsch downgraded BT to 'hold' from 'buy', cutting his target price to 400p from 506p.

'Having supported the shares against the market for quite some time, it is time to bite the bullet and rethink our view,' he said.

Analysts at Morgan Stanley cut their price target to 400p from 490p, although they maintained an 'overweight' rating on the stock.

'We stick with an overweight rating, but cash flow clarity is key whether from the third quarter results on Friday or in company meetings,' they said.

BT's bad news wasn't confined to the Italian shock, with management also reporting a downturn in its business and public sector division. It said those problems were likely to lead to flat revenues in 2017 and 2018.

The only positive investors can draw upon is that BT's dividend appears intact, with the company reaffirming a commitment to growth of at least 10% in 2017 and 2018.

Should that result in dividends of 15.5p for this year and 17.1p in 2018, as per Berenberg estimates, it leaves the stock trading on respective yields of 5.1% and 5.7%.

That could attract new income investors to the stock and, according to Haitong analyst John Karidis, is one of the reasons why Tuesday's spectacular slide was an overreaction.

'Based on our experience of BT and our work on the company to date, we think management has chosen to reflect the causes of [Tuesday's] profit warning onto revised 2017 and 2018 guidance, but not the continuing good performance of other BT divisions,' he said. 'As ever, BT always errs heavily on the side of caution.'

3 comments so far. Why not have your say?

IRVING STRUEL

Jan 28, 2017 at 09:46

Where has HONESTY gone????. There appears to be so much FRAUD in the stockmarket with just BT, TESCO & ROLLS ROYCE just three latest examples & do not forget the banks too. I am reserving judgement on any future further investments & I have been an investor for over 50 years. The boards just seem to adjust the so-called profits in order to receive larger payouts for themselves with NO REGARD for the truth???

report this

Dennis .

Jan 28, 2017 at 10:03

I once worked for a large company and made some comment to one of the company tax people saying I wonder how much profit we will make this year (it was early in the year). The answer was that it had already been decided and their job was to engineer it out of the various revenues and costs.

report this

Cheshire Man

Jan 28, 2017 at 12:46

What are the chances of the entire board of BT being sacked for their crass stupidity?

What about just one single member getting the boot?

A flick on the wrist, then?

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