Alexander Darwall’s European Opportunities investment trust has retained its positive rating from Stifel mere weeks after Wirecard, the portfolio’s largest holding, went under.
In mid June, Wirecard’s auditors would not sign off the company’s accounts because they could not confirm the existence of €1.9bn (£1.7bn) in cash balances prompting the share price to drop 70%.
The European Opportunities trust subsequently dropped 11.3% due to its 10.3% holding in the German payments business. Darwall (pictured) sold the position the same day prompting the share price to regain some ground. A week later Wirecard filed for insolvency.
A Stifel analyst note issued on Tuesday said that, while it was a decision that may surprise some, it was sticking by its positive rating and also viewed the wide discount as a buying opportunity. The discount on the European Opportunities trust is currently 10.1% compared to a 5.5% average over the past year.
“It is all too easy to throw in the towel on a manager after a high-profile investment disaster,” said the Stifel note. It said the portfolio was now “clean” and Darwall would be driven to regain his reputation. Darwall only announced his exit from Jupiter to establish his own boutique, Devon Equity Management, a year ago.
See also: Crispin Odey set for £100m windfall as Wirecard and Intu Properties implode
Scottish Mortgage a better comparison than Neil Woodford
The analysts went on to state the high conviction approach of Darwall was akin to Scottish Mortgage or Lindsell Train’s investment trusts.
The European Opportunities investment trust currently has three holdings with weightings above 10%, according to its June factsheet: Experian, Novo Nordisk and Deutsche Boerse. Its holding in Wirecard had once reached as high as 17%.
Stifel noted Darwall’s investment philosophy is to make significant investments in “special” European companies with strong barriers to entry, albeit in the case of Wirecard the company looked “special” due to fraud.
“Therefore, this is completely different to the Neil Woodford scenario as Alexander Darwall has not strayed from his core investment competency.” Woodford suffered a number of stock specific blow ups, including Provident Financial and cat allergy drugmaker Circassia.
Instead Stifel compared the situation to Scottish Mortgage’s holding in Tesla, which currently represents 11% of the investment trust’s portfolio but came under review 12 months ago when it was one of the most shorted stocks in the US.
However, that stock has experienced a very different trajectory to Wirecard with its share price increasing six-fold in the intervening period.
See also: Wirecard prompts Alexander Darwall to rethink weighty holdings
The difficulty for fund managers in determining fraud
Willis Owen head of personal investing Adrian Lowcock said he believes Darwall can learn from his Wirecard mistake and that his fund management skills should improve as a result.
“Fund managers do ultimately rely on the senior management team of a company giving them the right information and telling the truth,” Lowcock said.
“The judgement the manager takes is whether they believe the people are telling the truth or not. In frauds, it can be very hard to know for certain what is going on in the business and individuals committing the fraud are skilled at covering their tracks.”
Accusations of suspect accounting had been levelled at Wirecard as far back as 2008.
Tilney managing director Jason Hollands also noted even the best fund managers get things wrong. “Wirecard has undoubtedly been a whopper but you have to set this against a twenty year track record of mostly very good decisions.”
Hollands said the rest of the portfolio looked “pretty solid”. “It’s clearly been a bruising experience for shareholders, including the manager himself, and not particularly helpful for him as his new business beds in but the position was built, long before he span out on his own from Jupiter.”
