Fund managers hit by the collapse of drinks retailer Conviviality (CVRC) have reported back to investors on the demise of the company and the impact on their funds.
Conviviality, which owned the Bargain Booze and Wine Rack off-licence chains, collapsed into administration earlier this month, warning shareholders should not expect any return from the sale of those businesses to wholesaler Bestway, or the earlier offloading of its drinks distribution arm to Irish cider maker C&C (GCC).
The company had fallen from grace in spectacular fashion, issuing two profit warnings, revealing earnings forecasts had been overstated by £5.2 million and that 'an arithmetic error' meant a £30 million tax bill had not been accounted for, cancelling its dividend and suspending its shares, in the space of little over a week.
Citywire A-rated duo Simon Moon and Fraser Mackersie, managers of the smaller companies portion of the £102 million Acorn Income (AIF) investment trust, apologised to investors in their latest update.
'We have held Conviviality since its initial public offering in 2013, and we are very sorry to have exposed shareholders to such an experience,' they said.
The duo's stake in the company had accounted for 2.6% of Acorn's smaller companies portfolio at the end of February, and the company's collapse into administration this month accounted for the bulk of the portfolio's 4.1% losses in March.
'It appears that Conviviality's executive management team had misunderstood the full extent of the serious operational and financial issues within the business,' said Moon and Mackersie.
'By the time these problems came into full view, it was too late to save the business.'
Moon and Mackersie said prior profit-taking, together with the dividends they had received over the last five years, meant the trust would record 'a modest overall net profit on the investment'.
'A hard and painful lesson to have learned'
'It is hard to believe that the management information systems were not good enough for them to know when things had slowed down and that the sales team had so much discretion that they could sell at almost any price,' he said.
'At every stage of questioning it seemed to be someone else's fault.'
Chand Lall admitted he should have acted following the departure of Mark Aylwin, the 'once celebrated hire' brought in to integrate its Matthew Clark and Bibbendum drinks distribution business into the group.
'It was this same division, Conviviality Direct, where the main problems later emerged. His departure was the red flag that we should have acted on.'
Chand Lall said Conviviality's collapse had cost the fund all of the profits made on the investment together with the entire capital cost of around £16.5 million.
'Giving benefit of the doubt to senior management who had delivered before did not pay off at all in this case. It has been a hard and painful lesson to have learned,' he said.
'The shares fell from above 300p to 100p when the company announced a profit warning, but at that stage management stated the balance sheet was sound,' he said.
'Our analysis showed this to be an opportunity, and we increased our holding to 1.4% [of the fund].
Crawford said he was 'obviously very disappointed' by the company's collapse.
'But it is fair to say that it is most unusual for a public company of this size to be unaware of its own financial situation,' he added. 'A post mortem shows complete lack of financial controls within the business.'
First warning the trigger for some
'Despite initially taking profits in 2017 on valuation grounds and having sold further shares in January in light of a slightly disappointing update, the fund was nonetheless still invested in the company when it issued its first profit warning,' he said.
'Having assessed the deteriorating financial and trading situation
and harbouring pre-existing doubts about the company, the remaining investment in the company was liquidated.'
'It became apparent that management did not have full operational oversight of the business,' he said. 'Concern over the balance sheet was also an important trigger for the sale.'
Other managers to have sold all of their positions in Conviviality after the first profit warning were Nick Williamson, manager of the £357 million Old Mutual UK Smaller Companies Focus fund, and James Lynch, who runs the £46 million Downing Monthly Income fund, as previously reported.
Citywire A-rated Alan Custis and Alan Clifford, managers of the £73 million Lazard MultiCap UK Income fund, sold more than half their position in Conviviality after the first warning, with the remaining position caught by the later suspension of the shares.
They blamed 'poor management' for the 'rapid build-up of debt and a liquidity squeeze'.
'These errors fatally impacted what we believed were the company's two fundamentally sound divisions,' they said.
Andrew Moffatt, Nigel Beidas and Matthew Rainbird had previously sold some of their £53 million Marlborough Extra Income fund's stake in Conviviality but still had some exposure when the shares were suspended.
Other fund managers stung by Conviviality include Daniel Hanbury manager of the £714 million River and Mercantile UK Equity Smaller Companies fund, whose latest factsheet details the 1.8% hit to the portfolio from the stock's collapse.