Old-style research and scepticism would have saved asset managers from Steinhoff
In the Steinhoff fallout, asset managers who placed investors’ money in the disgraced company — along with analysts whose research they acted on — have advanced all manner of excuses for failing to spot accounting fraud at the retailer.
With respect, these excuses, such as the explanation that Steinhoff’s financial statements did not hint at fraud, assume that anyone listening possesses the intelligence of a rotten banana.
Investment research firms and brokerages are paid millions each year to examine companies in depth and to advise customers — including institutions such as Coronation, Sanlam and the ordinary shop on the street — whether these companies are worth buying or not.
Doing so on the basis of financial statements and interviews alone would be sloppy.
As Wall Street legend Sallie Krawcheck, who led three wealth managers during her career, put it in an interview with business magazine Fortune as far back as 2002: “I always took the attitude that I was being misled. If I went into a meeting with a company and it turned out they were telling the truth, I was pleasantly surprised.”
Krawcheck, then an analyst covering brokerage businesses at independent research house Bernstein, was relating a visit to the then Merrill Lynch’s newly purchased branches in Japan, which seemed to be doing well and thronged with customers. But following a hunch, Krawcheck decided to peel away from the tour group to visit other branches on her own. There she found business was thoroughly dead.
She recommended customers instead buy shares in a unit of Merrill’s arch-rival, Morgan Stanley, with Merrill later admitting “larger-than-expected losses” at the Japan business.
The Krawcheck story is one example of good, old-fashioned research, especially for analysts who may earn as much as R13.9m in a single year just for providing this service.
Financial analysis is just one of many elements investment analysts are required to cover as part of their daily duties.
Other elements include management and governance, an investment summary detailing recent developments (such as back-to-back, debt-laden acquisitions in the Steinhoff case) and industry dynamics — which should have raised uncomfortable questions about Pepkor’s 25% sales growth during the first half of 2017 in an environment in which similar retailers are battling.
Even though Sygnia CEO Magda Wierzycka has become a running gag on social media for an opinion piece in which she said she found problems with Steinhoff’s accounts within 30 minutes, she was correct.
As she said: “The structure was obfuscated, financial items made no sense, the acquisition spree was not underpinned by any logic and too frenzied to be well thought out, and debt levels were out of control.”
She invoked the liability clause included in many asset management contracts, questioning whether these asset managers were guilty of “gross negligence”.
Angered, many asset managers pointed to Sygnia’s own investments in Steinhoff but forgot to mention that indextracking funds comprise the bulk of the money manager’s main business, with the rest outsourced to multimanagers — external managers appointed to invest funds.
The mudslinging was a lot of fun to watch, until a sobering reality set in. While some asset managers insist the slide in the share price could reverse, with losses recovered, there are a large number of retirement funds invested in Steinhoff’s debt, most of which is due in the first half of 2018.
From scraps of news the company disclosed, it seems to be having liquidity issues, which is worrying for asset managers like Sanlam Investments, which has a R351m exposure to debt — some of it held on behalf of retirement funds — maturing early in 2018.
A spokesman for Sanlam says Steinhoff’s true state of affairs will become clear only when it releases its very late results for the year to September 2017, which should be before the end of January.
It is exposed to both the company’s debt and shares, and says it is monitoring developments.
As a debtholder, Sanlam will be one of the first institutions in the queue to get its money back if it is decided Steinhoff is insolvent and has to be liquidated to pay back creditors.
Shareholders — such as the Government Employees Pension Fund — will lose everything.
THE STRUCTURE WAS OBFUSCATED, FINANCIAL ITEMS MADE NO SENSE, THE ACQUISITION SPREE WAS TOO FRENZIED THESE ELEMENTS SHOULD HAVE RAISED UNCOMFORTABLE QUESTIONS ABOUT PEPKOR’S 25% SALES GROWTH