Questor: as a second holding unravels, it is time for us to let go of European Opportunities
No investment trust has caused more changes of heart for Questor than European Opportunities. We have bought, sold and bought again. Now we have another decision to make about its place among our selections.
Until now, our flip-flopping had revolved around just one stock in the fund: Wirecard, the German payments firm that went spectacularly from stock market darling to bankruptcy.
Before that dramatic finale we had advised readers to sell the trust at a time when it had what we regarded as too large a stake in Wirecard; we bought again when that stake fell.
We reviewed the trust after Wirecard’s demise but stuck with it on the basis that the manager, the hugely experienced Alexander Darwall, had learnt his lesson about taking big large bets on single companies – especially when those companies had been the subject of serious allegations in a respected newspaper such as the Financial Times, as Wirecard had been from the start of last year.
Wirecard was also a popular stock among “short-sellers” – popular in the sense that they bet heavily against it, normally by borrowing stock and selling the borrowed shares in the expectation of being able to buy them back more cheaply when the time came to settle the debt.
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It is short-sellers who have sparked renewed trouble for Mr Darwall’s trust. A short-seller called Viceroy Research has published a document that accuses another German company, Grenke, of accounting fraud and predatory business practices. Grenke was at the time a significant holding in European Opportunities, although Mr Darwall acted quickly to sell the fund’s entire stake.
Has lightning struck twice or is Grenke, unlike Wirecard, the victim of a baseless attack?
Grenke has called Viceroy’s allegations “completely unfounded” and commissioned KPMG, the accountancy firm, to conduct a special audit.
Questor is not in a position to say with any certainty whether Viceroy or Grenke is right and it’s not even the important question. What matters is whether, on the basis of what we know at present, we can judge whether Mr Darwall acted wisely or otherwise by allowing the stock to account for about 5pc of his fund.
Did, in other words, the attack by the short-seller come completely out of the blue and was there no information about Grenke available to anyone that could have led to reasonable doubt about the firm? Or was Mr Darwall again guilty of turning a deaf ear to facts or opinions that were at variance with his belief in the stock, as he had with Wirecard?
Questor sought the views of an investor who had been right about Wirecard and asked whether Grenke had given rise to similar misgivings. It had.
“Grenke is a company we’ve researched and thought frankly was too good to be true,” said Barry Norris, manager of the Argonaut Absolute Return fund.
“Think of it like a very profitable, fast growing bank that claims to lend without any real competition or rigorous credit checks, yet seems to do all of that without suffering any meaningful defaults.”
He added that the company’s failure to answer some of his questions had left him “feeling very uncomfortable”.
He said the firm kept raising money from investors despite the profitability it reported. “It doesn’t seem to generate much cash but claims to have big cash balances alongside lots of debt. These are all red flags,” Mr Norris said. He started to short Grenke shares in July 2018.
In Questor’s view Mr Norris’s misgivings about Grenke, which arose from publicly available information or from investigations that any fund manager could have undertaken, are cause for concern on the part of any shareholder.
We are, therefore, troubled that Mr Darwall was content to hold the stock until Viceroy published its paper. We have the impression that, as with Wirecard, he overlooked causes of legitimate doubt that were visible to other investors two years ago.
This column’s sense that he has not after all learnt from the Wirecard debacle gives us no choice but to sell his trust again.
Questor says: sell
Ticker: JEO
Share price at close: 673p
We promised to cover Temple Bar this week, but for reasons of space will have to postpone. Apologies.
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