HL misses the mark as it sells Burford amid short attack

Platform shouldn’t have needed Muddy Waters to point out issues it was concerned about


Hargreaves Lansdown has been accused of missing the mark as it says a short selling attack prompted it to sell its stake in Burford Capital in £827m worth of funds.

Within the HL Select range, the litigation finance stock was held in the £288m UK Growth Shares, £171m UK Income Shares and £368m Global Growth Shares funds but was sold this month in the aftermath of a critical report issued by short seller Muddy Waters.

In a note on the Hargreaves Lansdown website explaining the decision to sell, fund manager Steve Clayton (pictured) pointed to the complexity of the business, its large exposure to a case against the Argentine government and its poor governance.

The UK Growth Shares fund bought into the stock early and therefore enjoyed an 80% premium on the purchase cost.

However, both other funds lost money on the investment.

The UK Income Shares fund did not initially buy into the stock as it was building out its portfolio with dividend payers to match its income objective, while the Global Growth Shares fund only bought shares at launch in May. The investments have resulted in a net loss of 1.25% and 1.5% respectively to each fund’s value.

Muddy Waters wasn’t needed to point those issues out

7IM senior investment manager Peter Sleep said the issues raised by Hargreaves Lansdown had been evident before the Muddy Waters note.

Sleep said: “The corporate governance, valuation issues, cash flow and Argentina issues were always there and if they had done their work, HL should not need Muddy Waters to point them out, but it feels like HL analysis had missed the mark.”

Sleep said Muddy Waters’ analysis of the Napo Pharmaceuticals interlude had been more revealing, although Hargreaves did not reference this in its note.

That episode had implicated Invesco manager Mark Barnett, although he has denied the allegations via his employer, and name checked Neil Woodford, something Muddy Waters was accused of doing for headlines.

Burford case against Argentina

Burford first provided financing for the case against the Argentine government in 2015.

It was appointed by the Spanish bankruptcy courts after the nationalisation of an Argentine energy company sent a 25% shareholder in the business insolvent. Repsol, which had held a 50% stake, has already reached a $5bn settlement with the government.

In June, Burford valued its the Petersen vs Argentina case at $1bn although it currently has 61.25% of its original entitlement due to transactions on the secondary market.

The complexity of the business and questions over its approach to valuation had already been raised before the Muddy Waters attack, with Canaccord Genuity slashing its target price from 1,543p to 1,196p in April over concerns about Burford’s valuation, concentration risk and duration risk.

The report highlighted the profile of the Petersen case, noting its reduced target price implied 32% downside if the case was unsuccessful, as well as corporate governance shortcomings, including the fact Burford sat on the Aim market despite its £4bn market cap and that the CEO and CFO were married.

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