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!
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/
Someone far cleverer than me wrote the following about 4 years ago. It has taken me a while to get there, but I did work this out myself as you will have been reading.
Truly — to mix metaphors — butterflies flapping their wings now regularly create hurricanes that stop out fundamentally driven investors who cannot remain solvent longer than the market can remain irrational.
In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical. More butterflies.
Index and algorithmic fund [maneuverings] also make it very hard to ascertain what the markets ‘clean’ positioning is at any given time. All of which pushes up the cost of capital.
Letter to investors from Martin Taylor when announcing closure of Nevsky Capital hedge fund – 2016 (Source: quotation from ZeroHedge via Business Insider magazine, January 2016)
And he further added:
In summary, all of the above factors now mean that it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables. This pushes up our cost of capital and substantially increases the risk of us suffering substantial capital loss on individual positions either because of a forecast error or simply because we could be caught up in an erroneous market trend, which could then persist for far longer than we could take the pain. This has made what we enjoy most — the thrill of analyzing economic data releases and company accounts – no longer enjoyable. It is therefore time to accept that what we have done has worked brilliantly for twenty years but does not work anymore and move on. We are confident our process will eventually work again – for the laws of economics will never be repealed – but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money.
I refer to the childrens’ rhyme about liars, of course. UK citizens have to make their mind up about who is more trustworthy: the Durham police, who say they politely reminded Mr Cummings and family about the lockdown laws, or Mr Cummings who says they didn’t. At least, that is what I read.
This is not directly of relevance to investors but as Boris Johnson is backing Mr Cummings – how could he not, it would be like switching off his own pacemaker – then we might speculate that the incident is going to accelerate the rate at which the British public, like many in the US, begin to see ongoing restrictions on their lives as an attack on their personal freedom. So the behavioural scientists on the SAGE committee of experts tell us.
That in turn raises the question of a possible profile for Covid-19 infections that is a plateau for a while, maybe even an upward sloping one, rather than the anticipated bell curve, falling away to virtually no cases.
I personally don’t think stock markets will in the short term assess this as a relevant risk. I would suggest that it probably is, but may be mitigated by other factors: treatments that work, better weather, a potential vaccination (still unlikey to be soon in my view), or just something about the way the virus speads that has not been understood.
On the last point, I don’t think enough work has been done on links to industrial air pollution. With my intuitive feel for links between data sets, that has been an obvious line of enquiry for me from right back to the rapid spread in the Po valley in Italy.
So as at today, I would expect markets to sustain the positive mood. What will break that is a whole series of really poor data sets about the ecomonies of the world (a near certainty) or evidence that the pandemic is not over and may even kick off again seriously.
With those facts in mind, I would at this moment prefer to be investing in funds that are being run to be recession and virus proof (or at least have that risk hedged), or if a really cheap ‘sold off’ fund tempted me (as an experienced and adventurous investor), balance the risk by matching the purchase with something super defensive, like gold.