Viceroy: questions raised
AMONTH after the collapse of Steinhoff and the emergence of Viceroy, South African capital markets took another hit when Viceroy released its report on Capitec Bank.
The report – titled A Wolf in Sheep’s Clothing – reaches the conclusion that Capitec is a “glorified loan shark masquerading as a community microfinance provider”.
This is based on Viceroy’s analysis of publicly available data and a variety of assumptions.
Viceroy’s obscure profile notwithstanding, we know that it has a short position on Capitec and stood to make profits if the share price of Capitec fell.
As soon as the report was released, Capitec’s share went into decline.
The condemnation for Viceroy has been widespread as some have accused it of market manipulation.
PSG – the anchor shareholder in Capitec – has called for a probe into Viceroy’s true motives.
At the heart of the debate is whether an entity like Viceroy should be in a position to issue a report that could trigger a run on an entire bank, which has dire consequences for both depositors and the economy.
However, the reality that is lost in the hysteria is that a lot of investors take short positions on particular stocks.
More importantly, all investment managers worth a penny do commission research reports as part of their due-diligence processes.
Based on the results, they choose to either back the stock or – if they are convinced that there is money to be made on the downside – they can short the stock.
Due diligence is a key part of an investment manager’s job. Given the importance of such information, investment managers regard this as vital intellectual property and guard it as such.
If you believe the stock is worth shorting, you assume that your research skills have identified an opportunity in a pricing mismatch that the rest of the market has not picked up.
In a field as competitive as investment fund management, everyone prefers to guard his or her trade secrets and hence never release his or her reports to the public.
Viceroy, on the other hand, has a different approach in that it publishes its reports with the expectation that the market will react and the price of the stock will fall.
Instead of waiting for its suspicions to translate into reality, it fast-tracks the process through public utterances.
There is nothing legally wrong with this approach.
What needs to be debated is whether in instances where a short seller goes public with its views, other fund managers should also then immediately disclose their own research to articulate their own findings regarding that stock.
In that case, market participants and the public at large would be able to evaluate the viewpoints and make more informed investment decisions.
This would also contend with the market panic that occurs as soon as reports like Viceroy’s are released.
Until that happens, short sellers who wish to fast-track what they believe is the inevitable collapse of a stock will dominate the public discourse.
The concern with the Capitec story is that the issues Viceroy is challenging – practices regarding unsecured lending – are the type of issues every single investor in Capitec should understand most intimately.
Given the history of unsecured lending destroying so many banks in the past, this should be at the centre of all analysis and deliberations relating to Capitec.
Every fund manager with a position on Capitec should be able to immediately test the Viceroy report against its own assessment.
The fact that panic selling still happens indicates that either such reports don’t exist or, more disturbingly, our fund managers are far from clued up about the stocks they are exposed to.