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Darwall got out of Grenke but can he get out of the hole it and Wirecard left behind?

16 September 2020

Shares in European Opportunities investment trust slip 1% as investors digest implications of fund manager Alexander Darwall's disposal of Grenke after German leasing company was hit by a shorting attack.

Investors so far appear to be giving Alexander Darwall the benefit of the doubt following his sudden disposal of a long-standing holding in German asset leasing company Grenke after it was subject to a painful short-selling attack.

Shares in European Opportunities (JEO ), the £777m investment trust from which the 5.25% position was sold yesterday, have slipped just over 1% or 8p to  682p today.

The swift exit, announced 20 minutes after the stock market’s close, followed a punishing day for Grenke (GLJ.ETR). Its shares plunged 19% after Viceroy Research published a document accusing the Baden-Baden based company of accounting fraud and predatory practices against small businesses. Its ‘short’ position in the stock means it will have made money on the fall.

Grenke - which Darwall has held for nine years, according to Numis analysts - strongly denied the allegations, said it was preparing a detailed response and reserved the right to take legal action against Viceroy and its founder Fraser Perring.

It took particular issue with Viceroy’s accusation that a large part of Grenke’s €1.08bn (£1bn) cash balance was fictitious and that the company was another Wirecard, a reference to the German payments processor that was JEO’s largest holding until Darwall dumped it a week before its collapse.

‘This is demonstrably false,’ Grenke said in a statement yesterday. ‘€849m, which is almost 80% of the cash and cash equivalents, were held in Deutsche Bundesbank accounts on June 30, 2020 as published in the 2020 half-year financial report. As of today, the credit balance at the Bundesbank amounts to €761m.’

Investors in the company were not reassured and the shares have dropped another 32% to €30.1 today leaving the stock down over 41% over two days. Since the coronavirus pandemic hit Europe in February shareholders have lost two thirds of the value of their positions. 

By contrast, JEO has avoided the latest Viceroy-inspired plunge in Grenke. This morning the trust said its net asset value (NAV) per share at yesterday’s close was 782.63p, up marginally from 781.9p on Monday.

According to Numis, this compares with an estimate by data provider Morningstar of 780.2p for the full portfolio, ‘implying that JEO’s holding may have been sold at an average price high than where Grenke closed.’

The broker says Grenke shares traded at around €12 when Darwall first bought them in 2011, meaning JEO investors have profited from the investment, as they also did from a similarly long-term stake in Wirecard.

The relative calm in JEO’s share price indicates Darwall may have nipped the problem in the bud. The quick disclosure of the Grenke disposal means investors were not left in the dark as they were briefly when Darwall bailed out of Wirecard - something I criticised the manager and the trust for in a Citywire Funds Fanatic podcast in June. 

It also avoids the uncomfortable repetition of seeing Darwall defend a key stock when it is under intense scrutiny. His reputation for stellar stock picking took a big hit from the Wirecard scandal, where he stood by the company and its management despite repeated Financial Times investigations into financial irregularities which were subsequently proven correct when it collapsed in a huge accounting fraud.

Intriguingly, in the broker’s note to investors this morning, Numis suggests that Darwall may even buy back into Grenke once things settle down. ‘We understand that the manager did not want to be exposed to the speculation and shifts in sentiment surrounding the accusations as the facts emerge, but may revisit the investment case once the facts have been more clearly established. 

‘We can understand the decision by the manager to sell so that he is not seen to be making the same mistake again of backing management to the hilt,’ it added.

Nevertheless, the setback in a second complex German company held by Darwall in three months once again raises big questions about the manager’s investment process and the way he constructs the concentrated JEO portfolio.

Hopefully JEO’s annual report due next week will see Darwall comment in detail on the Wirecard trauma, while further information on Grenke is expected in the trust’s end of month update.

As we reported yesterday, this year’s events have hurt JEO which stands on a 12% discount to NAV. Although it remains the top-performing European trust over 10 years with 13.1% annual growth in the portfolio compared to its 11.4% sector average and 7.8% from the MSCI Europe ex UK index, over five years it lags rivals and the benchmark.

How events unfold at Grenke and how the manager communicates over the coming weeks could have a big bearing on whether he can stop the rot. Darwall has plenty of skin in the game, with a 3.2% stake in the trust worth over £25m, so has every incentive to get this right.

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