Comment and opinion for retail investors in the UK
I have recently seen data from the investment trade press recording what sort of investment funds have taken in the most money so far this year. That is a good indication of what advisers are recommending to clients and to a lesser extent what DIY investors are doing with their money.
Since writing my piece this morning, I have read a long explanation from Barry Norris of Argonaut Fund Managers as to why he has been shorting Wirecard stock, having spotted the potential fraud 2 years ago. I can’t offer a link to the article in the trade newspaper as you would need a registration as a finance professional, but the main elements will make their way into the public domain.
Here is a short extract:
“We have been amazed how the Wirecard share price has been so impervious for so long to cumulative substantiated accusations of wrongdoing which waved more red flags than you might witness at a communist rally. “
I have never met Barry Norris, although I once went to London with that intention. He skipped the meeting and sent his deputy who was great. I would have been offended but as the excuse was that he was going to his son’s birthday party, I took a liking to his attitude – clearly an honest man not afraid of his stating his priorities.
I have read his market output and seen his teleconferences on many occasions and he is one of those managers whose stock analysis is forensic.
I recommended his European Growth fund in my IFA days but it underperformed after he misjudged the Brexit vote outcome. After that we have had periods where momentum has been king and the Jupiter European fund, a long term large holder of Wirecard (in fact so large I looked up the company myself when reviewing the Jupiter fund), did far better, amongst others. Apparently the well known ex-Jupiter manager, Alexander Darwell has kept holding the stock in the investment trust he runs until this week, which slightly tarnishes his reputation.
The main Argonaut fund has fallen down the performance tables because you can select stocks for all the right analytical reasons and still find everyone else is not buying them.
It is perhaps a just boost for Mr Norris’ credibility and a reward to investors in his other, absolute return fund that he had been shorting Wirecard to the maximum, making him very unpopular with some colleagues. But proved right.
Some comfort to me too, as I really don’t like the current market when fantasy profit expectations (eg Nikola) are rewarded by incredible (that is exactly the right word) share price valuations.
Those subscribers who have talked to me about European funds in the recent past may recall me mentioning that Wirecard AG, a German money transmission business which had been a favourite of some well known European fund mangers for years, had been the subject of an investigation by the Financial Times who suggested that its accounts were falsified.
That generated a reaction from people in high places suggesting the FT was the patsy of operators shorting Wirecard shares. That to me seemed unlikely, given the reputation of the paper and the precision of its findings. I believe that the biggest owners of the stock secured re-assurances from the firm’s top management which they accepted. These turned out to be worthless as it is now reported that about 2 billion euros has vanished.
How is it that fund managers with decades of specialist experience owning many millions of a given company’s shares don’t find holes in the accounts that journalists (albeit specialist ones) can spot?
Primarily because not many fund managers are accountants nor do they necessarily have forensic accountants in their support team. A well organised manipulation of financial reports is devilishly hard to find from the information in the public domain. Journalists have access to whistle blowers – fund managers do not.
I personally do not fault fund managers for not seeing things that are likely invisible from the outside of a business. I do however think about why they don’t take the line ‘if it smells like a dead rat – it is a dead rat’ (well known to owners of thatched properties!). In other words, why do they accept the assurances of the management over and above the evidence presented by the investigative journalists?
I guess I really know why: a fund manager who owns a large block of a company’s stock over a long period will know the CEO and the CFO reasonably well and if he has made a lot of money up until know from the stock, he may have an unconscious bias of loyalty (in fact that is a proxy for all sorts of other recognised biases), not wanting to take the side of the doomsayers and short sellers. (I have added a Glossary item on Short Selling for subscribers)
Furthermore, if the stock takes a hit on first publication of the story, after getting a quick denial from someone they know and trust, fund managers may even see an opportunity to ‘top up’ at lower prices. One has to assume that sometimes even very senior staff in a large firm are offering re-assurances based on the real belief that all is well, not knowing of a fraud perpetrated by one person or a small inner circle.
My experience over the years of published claims of dodgy accounting by large corporates is that they are almost always validated. I think this is because the source is either a fund manager who is a bright fully qualified accountant, or a senior whistle blower. Both are very likely to be accurate in their assessment.
It is true that some short sellers employ people to actually look for overly optimistic management assessments of businesses and if you are owning that share, you naturally hate them for that. But that is a bit like hating your purchaser’s surveyor when he or she reports that your house is full of woodworm and being undermined by your favourite tree! You are bound not be pleased that the house is suddenly harder to sell, but the information might actually be of good use to you!
Since I posted this morning, I have read 2 news items that ought to be brought to your attention! My primary source is the New York Times excellent Dealbook daily briefing.
One is that in their attempts to explain the illogical level of current stock market valuations, some professional traders point to the increase in private traders using the stock market as an entertainment medium in the absence of sporting events to bet on. Add that to the increase in day traders partly driven by on-line stock punting services (some of which must get close to what is legal in term of pumping shares) and it is a credible suggestion of at least a contributing factor.
Something like that happened before the Wall Street Crash, as I recall……
The second point is a bit technical but important. It has been noted that the huge Japanese investment/holding company Softbank, which operates more like an investment trust, with its Vision fund as a major activity, has been noted to be buying up bond issues from companies of which it has significant equity stakes.
Now this can be seen in a number of ways but the most negative interpretation might be that it is bailing out cash flow issues to prevent its investment targets going under. With Softbank, which made a fortune by investing early in Alibaba, nothing is a small deal. I wonder if this is another hairline crack in the dam (its disputed deal with WeWork being a slightly worrying to?). Google the name if you want to know more – it makes interesting reading for investors!
This matters not only to Japanese stock market investors because Softbank is a major shareholder in numerous global businesses. If Softbank goes pop, global stock markets would feel the chill.
I have nothing new to say this week and markets are see-sawing with the economic news. Previous posts are still relevant, I think.
I have instead spent my time recording some of the key mantras I find myself stressing in the training sessions I run. These have been added as a new page in the permanent site content under the Real World tab. Here is a link https://www.itsnotharry.com/10-top-tips-for-investors/
You may have read stories about an American company that will list on NASDAQ called Nikola. Unsurprisingly it is a self proclaimed competitor for Tesla.
Now readers will know that I think Tesla’s stock market valuation is bizarre relative to its business model but it has now reached the point of actually making stuff and in some cases pretty successfully – just not at a profit. I think I must own some Tesla shares through one or more of the innovations or discovery funds I like, but I would not personally buy them.
Unlike Tesla, Nikola has not yet made a single vehicle. I note that in 2016, within a year of being founded, it was reported to have taken billions of dollars of pre-orders for trucks it has ‘thought up’ (my phrase). This week’s news stories reference billions of dollars of pre-orders again (the same ones?). But it has told the American listing authority (where you have to be honest, or you go to jail) that it plans to make 600 trucks next year. 600 – in a year!
I believe Ford and GM make that many trucks each every day, and maybe more.
Yet the notional stock market valuation of the new company is claimed by its CEO to be approaching that of General Motors. Nikola is a company who say their revenue will be about 3 billion dollars in 2024 (revenue, not profit) which compares with an actual, not projected, 2019 revenue at GM of about 138 billion and an 8 billion profit.
None so blind as they who will not see, as the saying goes. They have raised half a billion dollars to keep trying to make a business. As has been said many times, it is easier to borrow a billion than a million.
There will be a price to pay when these fantasies vanish like morning mist. The direct losses may not impact you or me, but there will be an indirect impact as supposed value vanishes from the global capital markets.