ANDY BROUGH, the much-admired Schroders stockpicker, was in a sombre mood during the Christmas drinks season. And it’s no surprise.

The blue-chip FTSE 100 may have fallen about 35% in the past 12 months, but the mid-cap index, where Brough plies his trade, has fallen even further.

Only 13 companies in the FTSE 250 look destined to end the year in positive territory, according to research from KBC Peel Hunt. About 17 will have lost more than 80% of their value.

Guessing the winners and losers is not as easy as one may assume. Yes, last year’s top-performing mid-cap stock was a gold miner, Randgold Resources, which clocked a 60% share-price gain aided by rising gold prices.

However, five of the top 10 mid-cap stocks were financials. Lloyd’s insurers Amlin and Hiscox have both recorded share-price gains of more than 20%. Rival underwriter Catlin climbed 12%, while insurance broker Jardine Lloyd Thompson has soared by 43%.

Unexpectedly, a sub-prime lender is near the top of the charts. Provident Financial has recorded a modest share-price gain of about 3.5% in spite of the financial chaos. With banks cutting credit, more and more families have been turning to Provident’s high-interest loans after being refused credit elsewhere.

The same broad economics should apply to rival doorstep lender Cattles, but it’s not that simple. Cattles has seen its shares plunge by about 95%.

Like all the poorest performers in the mid-cap index, Cattles has become caught up in worries about its balance sheet. A £500m funding line has to be renegotiated by July and talks with the group’s banks, led by Royal Bank of Scotland, seem to be caught in an awkward stalemate.

Debt worries have also plagued Mecom Group, the newspaper business run by former Mirror Group executive David Montgomery, which has seen its shares lose 97%, along with housebuilder Taylor Wimpey, which has lost about 95% of its value. Johnston Press, the regional newspaper group, has lost about 94% of its value, and pubs group Punch Taverns has dropped about 92%.

All these businesses were acquisitive operators that took on debt to do deals at the peak of a white-hot credit cycle. Now they are being forced to rip up their business plans.

There’s a lesson there for those who want to survive in 2009. Big fund managers, such as Schroders, have got cash they are willing to invest in the right companies. They are tired of accepting penurious debt-for-equity swaps.

A number of fund managers are now leaning heavily on companies with a debt problem and encouraging them to launch a rights issue — and to do it fast. They have no appetite for becoming minority shareholders in companies where state-owned banks end up with control.

At this stage in the cycle companies that admit defeat and press ahead with large rights issues will be rewarded rather than punished. The larger crime is to sit back and deny that there is a problem while share prices tumble.

Paragon

SHARES in buy-to-let lender Paragon bounced 14% on Christmas Eve. The firm once dubbed “the next Northern Rock” is winning back fans in the City.

Funding concerns that were driving it towards an early grave 12 months ago were resolved with a £287m rights issue.

Paragon is not even attempting to find funding to write new business, it is just sitting back and watching modest profits roll in from its existing mortgages.

It could become one of the recession’s unexpected winners.

iain.dey@sunday-times.co.uk

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