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Corporate mishaps: why investors must stay diversified

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

If you have a low cringe threshold, you might want to look away now. This has been a bad week for corporate embarrassments.

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So much for having started the week on so-called Blue Monday, the glummest day of the year; a number of people in the corporate world will no doubt have been left rather more red-faced than blue this week. That may come later, of course, when the effect of the boo boos they have made hits home.

It’s fair to say that human error doesn’t often tend to appear in such a high profile way when it comes to the corporate trading statements of FTSE companies. So this week’s collection of human culpability is, not surprisingly, likely to provoke a wry smile at least.

However, while mildly entertaining it may be when it occurs, it also highlights the need for investors to maintain a truly diversified portfolio that means they too can laugh at the mishap and move on, should one of the companies they invest in fall victim to human error.

First up for humiliation was Dixons Carphone, which came out with a gushing trading update at 7am on Tuesday. It claimed that group sales were up 2%. There was talk of peak season hitting all the right buttons for the electrical goods retailer as buyers snapped up super-sized TVs and £300 supersonic hairdryers.

It turned up the last bit was true. Unfortunately the alleged 2% rise in sales was actually a 2% fall. #Awks.

Then today it’s the turn of Ted Baker. Again.

You might think things couldn’t get much worse for a company that has already seen the departure of its founder Ray Kelvin after a ‘hugging’ scandal highlighted how inappropriate behaviour had become the ‘norm’ for quite some time at the high street fashion retailer.

So far, so embarrassing, especially at a time when the #MeToo campaign was at a peak. But it got egg on its face again when it emerged that the company - or at least its accountants, KPMG - had got its figures wrong. Something that Dixons Carphone can now no doubt empathise with.

At the start of December Ted Baker warned that it had overstated the value of its inventory by between £20 million and £25 million. By the end of the month its chief executive Lindsay Page had resigned after just months in the job and the company had issued its fourth profit warning of 2019, saying full-year profits would drop by as much as 90%, and with little hope of an improvement in trading.

Today Ted Baker has warned that it will need to write down the value of its stock by more like £58 million, after an independent review carried out by Deloitte this time found its inventory, as reported at the end of the previous financial year ending in January 2019, had actually been overstated by 25%.

And last, but not least, Sainsbury’s Mike Coupe also warrants a mention in this week’s red-faced round-up. Sainsbury’s has announced that he will step down as chief executive, a post he has held for the past six years, at the end of May and retire from Sainsbury's in July.

The first embarrassment for Mr Coupe came with the failure of the proposed £7.3 billion Sainsbury’s/Asda merger and questions about his future at Sainsbury's soon began to be asked.

It was a deal that Mr Coupe, for one, clearly thought was very much in the bag. In what was arguably his first real cringe-inducing moment, he was caught humming “We’re in the money” to himself as he waited to go on air to discuss the then-planned merger with Asda.

All these mildly-comical tales of corporate embarrassment are a reminder that companies are still, to a very large extent, dependent on people behaving in expected ways. If either the people running them, or the people they are selling to - as the retail rout and the ongoing consumer spending slowdown has shown us - make an error or an ill-judged decision, the consequences can be far-reaching.

You don’t often see corporate error cited as a core reason to keep a diversified portfolio, but as these corporate mishaps and the share price movements of these companies show, they are a very good reason to.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Please be aware that past performance is not a reliable guide indicator of future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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