The investment by GQG in Adani backfired – is its reputation tarnished for good?

12 months ago, the investment by GQG in Adani was something to admire about the company. It was an example of a bold bet that had paid off given the returns it had made. But the charging of Adani boss Gautam Adani with fraud has had a knock-on effect to GQG.

Why The investment by GQG in Adani has gone sour

In late November, Guatam Adani was indicted with seven other men in New York federal court, accused of having paid Indian government officials over US$250m in bribes to obtain solar energy supply contracts worth over $2bn in profits. Gautam, his nephew Sagar and Vneet Jaain (another executive in Adani Green Energy) were charged with securities fraud conspiracy, wire fraud conspiracy and securities fraud. Obviously if the bribery allegations are true, then the company misled investors (specifically those who paid for bonds which raised capital for solar energy contracts – over US$175m) about its antibribery and anticorruption practices. The charges are laid in New York because the actions occurred there.

This came only 12 months since short-seller firm Hindenburg Research published a note accusing it of engaging,’ in a brazen stock manipulation and accounting fraud scheme over the course of decades,’and labelled it,’ the largest con in corporate history’. Adani did what all companies would do, issue a report denying the allegations. But that report is probably the least of worries by now. Adani’s shares have been gradually rising again and Guantam responded to the allegations.

‘Every attack makes us stronger and every obstacle becomes a stepping stone for a more resilient Adani Group’, he said.

‘In today’s world, negativity spreads faster than facts, and as we work through the legal process, I want to re-confirm our absolute commitment to world class regulatory compliance,” he added, without giving further details’.

GQG pays the price

OK, so one bad investment isn’t too big a deal, right? Fund managers can make mistakes, but hopefully learn from them. And Adani is just 6% of Assets Under Management. Well, investment bank UBS issued a note that estimated outflows of A$600m in FUM in two days after the indictment. It also downgraded GQG from a buy to a neutral rating. Only a few days later, it upped the estimate to A$1.5bn.

This is a small proportion of GQG’s Adani investment, but investors arguably fear a slippery slope where investors will withdraw money enmasse. You need only look at Magellan to see what happens. This report by UBS was enough to send it 14% lower on Monday December 2. What is more is that the company had been having solid inflows, mostly due to a sub-advisory agreement with Goldman Sachs. But UBS revealed inflows dropped to nearly zero.

Adding insult to injury UBS also predicted that its funds would fall, with emerging markets by 10% in the 12 months to January, and its other 3 by 6-10% in the same period. Barrenjoey issued a note too and although it kept a buy rating, it cut the price target from $3.90-$3.50.

The lesson for investors

When you invest in a money manager like GQG of Magellan, this is one of the biggest risks – major investors pulling money from the fund for whatever reason. And this can lead to a kind of ‘bank run’ where more and more investors pull money out. Now, we are not predicting GQG will collapse, but it may well suffer more outflows of funds as a result of this call, particularly if those allegations by Adani end up being proven. There’s risks with investing in all stocks, but this risk is unique to investing in fund managers.

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