It’s a mark of how many fund managers have fled the stock that tracker funds, which simply replicate an index, account for a large proportion of the funds still invested in Interserve.
He had been buying more this year as the shares had fallen, upping his stake from around 1.2 million of the company’s shares to 1.9 million between February and August this year. That position at the end of August, the last disclosed by the fund, accounted for 1.3% of the company’s shares, and 1.9% of Hunt’s portfolio.
His positions are smaller, with stakes that represented 0.2% of the UK Equity Income & Growth fund in its annual report to the end of June, and roughly the same proportion of the Law Debenture portfolio at the same date.
It’s a measure of how far the shares have fallen that by Friday’s close, even before today’s crash, they represented around 0.1% of the fund and the Law Debenture trust, and around half that in Law Debenture.
Even for managers who, like Hunt, had adopted a higher conviction position on the shares, today’s crash, while painful, hasn’t done as much damage as the months that have preceded it.
After peaking at over £7 a share in 2014, Interserve has been in steady decline since, a process that has accelerated dramatically in the last two years.
Even before today’s fall, the shares were down 76% since the turn of the year, and that was after falling 71% in 2017.
Henderson highlighted the stock as one of the of the main detractors to performance in the 2017 annual report for Law Debenture, alongside Carillion, Interserve’s rival which collapsed earlier this year, in which Henderson also invested.
‘These two companies both had problems with large contracts that they had mispriced,’ he said, adding that the lesson from Carillion’s collapse was that ‘a very conservative balance sheet is necessary to withstand the risks inherent in the contracting industry.’
Even as fund managers have gradually deserted Interserve as its problems have worsened, its ever-declining share price has occasionally tempted some into the belief that they could profit from a turnaround.
Among them were Artemis managers Derek Stuart and Ed Leggett, who invested in the stock through their UK Special Situations and UK Select funds, only to sell their stakes in October last year. While Artemis’ sale of what had been a 10% stake in Interserve has been vindicated by the shares’ decline since, the holding still knocked the funds.
Legget described the stock as the ‘bête noir’ of his fund in his 2017 review, admitting at the time of the sale that ‘our investment thesis – that the company could avoid a highly dilutive equity raise/debt restructuring – is likely to prove incorrect’.