Viceroy mess a good lesson

AND WE BOUGHT INTO THE MYTH

Intellidex says report’s unearned influence shows how information can be used to affect share prices.

While maintaining that short selling “can have a positive effect on capital markets” by improving market efficiency and price discovery, Intellidex argued in its report on Viceroy that it is vital to scrutinise whether what activist short sellers are doing is legitimate. Put simply, is the research on which they base their activism well-founded?

In the case of Viceroy, Intellidex was critical of the firm’s output. It found its report on Steinhoff, which catapulted it to prominence, was “substantially plagiarised” and the quality of its research since then “appears to have deteriorated”.

A particular case in point is Viceroy’s analysis of Capitec, which has been roundly criticised. Intellidex found it was not objective, that it cherry-picked negative information and failed to “provide a reasonable basis for the conclusions that it draws”.

Despite these failings, however, the report had a significant impact on Capitec’s share price. From a high of R1 069 in the days before the report was released, Capitec dropped to R800.

It is worth asking why such a questionable report had such a serious impact. Why did anyone pay attention to research Intellidex said “exhibits a failure of professional standards”? The answer lies in the aura Viceroy generated through the release of the Steinhoff report.

“We all get taken in by a good story,” Intellidex’s executive chairman Stuart Theobald said. “When Viceroy published the Steinhoff report, it was anonymous, there was lots of speculation around it and a kind of mythology was created.”

As the media, we bought into this myth. Starved of just about any information on what had actually happened at Steinhoff, Viceroy’s analysis was sensational.

It was good analysis too, so good that when rumours began circulating that Viceroy was working on a report about another South African company, we knew it would be big news.

Which is why when Viceroy published its research on Capitec, we made a cardinal journalist error: we published first and asked questions later.

However, within hours of the research being released, its tone and some of its more extravagant claims were already being publicly questioned. Before the day was out, serious misgivings were being raised.

We reported on these doubts and the narrative around the report changed fairly quickly, not least because of Capitec’s own excellent response and the confidence expressed in it by local regulators. Yet the impact had already been felt.

As the media, we had to acknowledge we had been caught napping. We didn’t stop to consider what was actually in it and whether it deserved our attention.

Bear in mind that research reports are released every day. Almost none make the news.

Yet, because of the sensation that had been created by its report on Steinhoff, Viceroy’s Capitec report was a lead story.

Intellidex rightly noted that: “While we have argued that Viceroy has an unearned influence which it has used to affect prices beyond that justified by its research, it has played a positive role in giving South Africans an opportunity to assess and understand the actions and motives of short sellers. In that respect, Viceroy has done a public service.”