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James Carthew: this trust swerved Conviviality crash

James Carthew: this trust swerved Conviviality crash

The collapse of stock market darling, Conviviality (CVRC), has caught a few people by surprise. Quite a few UK small cap managers benefited from Conviviality’s rise. It came to the market in an initial public offering in 2013 at £1 a share and immediately started trading at a big premium. Its shares were trading in the 420’s back in November 2017 but they plunged to 101p on 14 March, when they were suspended from trading on the Alternative Investment Market.

Since then, Conviviality has fallen into administration and offloaded its off-licence chains and drinks distribution business, warning shareholders to expect no return. Those for whom it was a big position in their portfolio are going to be left with a bit of a headache; the morning after the night before!

Conviviality was the owner of off-licences Bargain Booze and Wine Rack, Matthew Clark the wholesale business and Bibendum the wine specialist. It supplied all the wine and spirits to 900 Wetherspoon pubs and to Stonegate, which has 690 pubs including the Slug and Lettuce chain. The brewer Wadworth, which owns 200 pubs and Mitchells & Butler, owner of O'Neill's and All Bar One, were also clients.

In January 2018, the company announced half year pre-tax profits of £7.4 million. However, in early March, it came out with a warning that its forecast for underlying earnings for 2018 would have to be lowered from £70 million to £55 million. It also told the market that it had a tax bill of £30 million that it needed to pay by the end of the month. Clearly something had gone badly wrong. The company tried to raise £125 million from investors but this failed. Almost immediately, the administrators were called in.

Funds such as Diverse Income (DIVI), Acorn Income (AIF), Value & Income (VIN), Chelverton Small Companies Dividend (SDV), Lowland (LWI) and Henderson Opportunities (HOT) all cited Conviviality as a major contributor to their returns over 2016/17. Some of them will have been trimming the position but one fund that I know sold its stake well ahead of the price falls was Seneca Global Income & Growth (SIGT).

Mark Wright, Seneca’s UK equity research specialist, started to become more cautious on the stock in November. The resignation of the chief finance officer on 18 October was followed closely by a trading statement on 7 November where two accounting errors were acknowledged. The fund had already made 60% on its investment and he was also concerned about the valuation of the stock. Wright felt that there was a risk that more serious issues could emerge. This combination of factors unnerved Wright; Seneca’s entire stake had been sold by the end of December.

This seeming prescience is echoed in the tale of Seneca Global Income & Growth’s investment in Ranger Direct Lending (RDL). You may recall that on 22 December 2016, Ranger announced that Princeton, a credit line platform for small and medium-sized businesses through which Ranger invests, had lent money to Argon Credit, which had filed for chapter 11 bankruptcy protection in the US. Ranger’s indirect participation amounted to $28.3 million (£20 million). Since then the tale has gone from bad to worse, with Princeton filing for bankruptcy in March 2018.

Prior to the announcement, Seneca Global Income & Growth’s managers had already taken some profits on valuation grounds and cut the position aggressively when the Argon news was first reported, this meant that the fund avoided much of the capital loss it might otherwise have faced. Around the same time, the managers grew nervous about SQN Asset Finance Income (SQNS) and chopped that position well in advance of its well-publicised problems.

Seneca Global Income and Growth’s absolute return, low volatility approach is delivering steady returns in the second quartile of its flexible investment peer group. Seneca’s sell discipline seems to be working and serving the fund well. Deciding when to part company with a stock that looks, on the surface at least, to be doing well is hard. On a bigger scale, for the last year its managers have been reducing the fund’s exposure to equities in anticipation of a market setback in excess of what we have already seen, in anticipation of a global recession in 2020. I wonder if they will appear to have been equally prescient with this decision.

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