UK Edition
Falling in love with a stock is by universal agreement a bad idea. Private investors are routinely warned against it but the misfortune can afflict even the most experienced professionals.
Alexander Darwall is one. Mr Darwall, who has managed the European Opportunities trust for many years and made shareholders handsome returns in the process, endured a lengthy entanglement with an unsuitable stock. After the inevitable parting of the ways following many unhappy twists and turns, he is left burnt – as are his investors.
We have told some of the story in this column in the past but it’s worth recapping as a cautionary tale for all investors.
Mr Darwall had long owned, as his fund’s largest holding, a Germany technology company called Wirecard. For a long time it seemed an inspired choice: the share price soared and all the noises from the firm were positive. It all started to go wrong when the Financial Times reported alleged financial irregularities early last year.
The share price fell steeply as investors expressed, at the very least, their newfound doubts about the firm. But Mr Darwall backed Wirecard to the hilt.
He said in the trust’s interim report published in February 2019: “We have never had cause to doubt the company. Until and unless there are substantive and substantiated charges we remain confident that the company is strong and well placed to prosper.”
With the benefit of hindsight this now seems a complacent statement. It rather suggests that Mr Darwall was prepared to sit back and wait for the doubters to prove their case rather than use their doubts as a prompt to investigate more thoroughly himself. In this period, however, Questor’s misgivings were not so much about Wirecard as a company but about the very large stake in it that Mr Darwall continued to own.
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We felt that to allow any stock to have accounted at one stage for almost a fifth of a fund – a fund that was owned by ordinary savers and was not set up as some kind of specialist, high-risk portfolio – was wrong in any circumstances but especially wrong when doubts from respected sources had been raised about the company.
It was this that prompted us in March last year to advise readers to sell the trust. We could understand Mr Darwall’s reluctance to give up on the stock entirely – it was not at that time certain that Wirecard did indeed have questions to answer – but we felt his sticking to such a large stake in those circumstances was misguided.
He later acknowledged as much. He said in late January this year: “I must apologise to people for having too much in it [Wirecard], which is a fault I accept. We won’t have such a big holding in an individual stock again.”
This was music to Questor’s ears: a few weeks earlier this column had been happy not only to regard the trust as worth buying again but make it our investment trust tip of the year for 2020.
In that column we reported the views of a professional trust picker who anticipated Mr Darwall’s apology. “I think that, whatever he says publicly, he is likely to be a little more hesitant in letting anything grow to be that big in the future,” Andrew Lister of Aberdeen Standard Investments told us.
The unhappy ending as far as Wirecard is concerned came last week when events at the company moved from the realm of speculation to that of fact. Its auditors decided that €1.9bn (£1.7bn) of cash that the company claimed to have could not be found; indeed they doubted its existence. Later Wirecard admitted that they were probably right.
Naturally the share price dropped like a stone. Mr Darwall has now sold all his Wirecard shares.
It now seems clear that he was indeed in love with this stock – blind to its faults, prepared to overlook warning signs. One fund manager told this column a couple of months ago: “It’s so obvious to me that Wirecard is a fraud. I can’t believe that some professionals still own it.”
Where does that leave our tip? One bad selection does not make a fund manager bad.
Despite Wirecard, Mr Darwall’s long-term returns are good. This experience will at least have taught him a powerful lesson – one that should make his portfolio more resilient and more balanced in future.
Questor says: hold
Ticker: JEO
Share price at close: 698p
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