Hargreaves drops Burford after attack by Muddy Waters

FUNDS run by Hargreaves Lansdown have sold out of Burford Capital after one of its managers admitted that he no longer knew whether the stock was a viable investment.

Hargreaves owned stakes in the beleaguered legal financier in three of its funds: Select UK Growth, Select UK Income and Select Global Growth.

The fund manager, Steve Clayton, said there were many reasons for the sale, although it mostly came down to a recent attack on Burford from a “short seller” – a firm that bets on a company’s share price falling.

The short seller, Muddy Waters, has published reports critical of Burford’s accounting policies, management structure and growth potential. The attack, which began in earnest this month, has led to a 54pc share price fall.

In response, Burford has said Muddy Waters’ claims were “false and misleading”.

Mr Clayton said the impact on his three funds was mixed as they had bought the shares at different times, but the UK Income and Global Growth funds saw losses of 1.3pc and 1.5pc respectively.

Questions will be raised over Hargreaves’ initial decision to back Burford Capital and to sell out only following Muddy Waters’ criticism and the huge share price fall.

Muddy Waters’ initial report, on Aug 7, offered little in terms of new criticism or detail about how Burford operated. Owners such as Hargreaves had a long time to decide whether they were comfortable with the firm.

Canaccord Genuity, a broker, had made similar criticisms regarding how Burford accounted for future revenue and the qualifications of senior management long before August. Burford had also already issued a defence against these accusations.

Other holders of Burford shares, such as Neil Woodford and Invesco’s Mark Barnett, have maintained support for the company throughout the drama despite the huge paper losses incurred by their funds.

Mr Clayton said: “We may have been wrong to have sold out, or we may have been wrong to have bought in the first place.” He said Burford’s business model – which is to take money from investors, finance lawsuits and make profits from the winnings – meant bad publicity could affect future revenues.

Mr Clayton said: “We only own a handful of stocks so we have to have real conviction in every holding. Muddy Waters has not proved that Burford is a chimera, but questions so far remain unanswered.”

Burford declined to comment.