Evil Knievil: Earnings galore

There are fads in investment which last much longer than seems remotely possible when they are strutting the stage. They outlast and exhaust rational investors. Rather like Keynes’s observation that the market can be irrational longer than the speculator can be solvent.

For instance, Stephen Hendry’s Eclectica had a very sound stock selection policy (Stephen did the selecting) but had to close since persistent withdrawals by Eclectica’s clients rendered the fund to shrink so much that Stephen’s costs swamped his revenues. He had to give best to the irrationality of retail investors.

Investment in illiquid stocks whose values cannot be brought under pressure (since borrow and market conditions deny that avenue) is a new phenomenon rendered possible by investors’ willingness to overlook obvious reasons for doubt. With Woodford Patient Capital (LON:WPCT) the willingness was caused by Neil Woodford’s terrific track record at Invesco being thought to promote the presumption of a repeat performance at his successor firm. A mistake as it has turned out.

One has to be very careful about explaining this result here since defamation lawyers are just waiting for a false step. So, I shall not try to categorise Woodford management as engaged in fantasy or worse. But one has to ask how perfectly sensible fund managers managed to assemble the WPCT portfolio.

Here one has to respect the terrific work done by FT Alphaville/FT Adviser in recent times since their analysis of the conditions of the loan by Northern Trust, the Chicago bank, raises questions as to how this loan was ever conceived and extended. WPCT has a £150m overdraft facility which might be thought to be easily covered by Northern Trust’s belief that there is still around 500% of this £150m by way of collateral. The trouble is that that figure is highly suspect if it falls to be tested. As it almost certainly will be in the coming days. Indeed, as matters stand, the debt to Northern Trust might prove not to be covered sufficiently to leave WPCT free of debt.


All this leaves WPCT a screaming short at 57p.

At a personal level I recall restrictions being placed on the percentage of an investment trust (15%?) that could be taken on board when unquoted. I thought the DTI were simply being unimaginative. But this was 50 years ago, and I was wrong. The DTI had looked into the future and proved much wiser than I.

*****

Elsewhere, Hardman and Co.’s note of last week on Six Hundred Group (LON:SIXH) leaves the bull case enhanced. 20p should surely be readily eclipsed. Please note that this stock is switching over from being regarded as an asset cover story to earnings galore.

*****

Finally, the figures for Caledonia (LONCLDN) investment trust are really most impressive. As regards the timing of stock acquisition I leave comment to MI’s Nick Sudbury: he specialises in investment trusts.