Stein­hoff — The largest cor­po­rate fail­ure on the JSE


The fail­ure of Stein­hoff has shocked even the most sea­soned as­set man­agers. It is the big­gest cor­po­rate fail­ure on the JSE.

Al­le­ga­tions of earn­ings ma­nip­u­la­tions, un­con­trolled ac­qui­si­tion sprees and tax fraud are just the tip of the ice­berg. Off-bal­ance sheet com­pa­nies were set up to hide losses, ex­ec­u­tives col­lab­o­rated with each other to de­fraud in­vestors, and debt was taken on at a mas­sive pace. The warn­ing signs were all there.

The most ob­vi­ous of those was the cyn­i­cal move by share­hold­ers in PSG to, in a sleight of hand, swap their share­hold­ing in PSG shares in South Africa for a sud­denly-Frank­furt-listed Stein­hoff, thereby ex­ter­nal­is­ing their wealth with­out the need for for­eign ex­change con­trols ap­provals. This alone should have been a strong in­di­ca­tor that one is not deal­ing with pil­lars of so­ci­ety. Many names are im­pli­cated. Many more will fol­low.

The se­ri­ous ques­tion to ask is how so many ac­tive as­set man­agers in South Africa missed this. Prid­ing them­selves on metic­u­lous re­search, scru­tiny of bal­ance sheets and in­come state­ments, backed by in­ter­views with man­age­ment, they should have seen what was ob­vi­ous from the be­gin­ning that this was as close to a cor­po­rate-struc­tured Ponzi scheme as one can get.

When I looked at the fi­nan­cials of Stein­hoff (not my day-job, by the way) I had an­other Net1 mo­ment – it took me ex­actly half an hour to fig­ure out that the struc­ture was ob­fus­cated, that fi­nan­cial items made no sense, that the ac­qui­si­tion spree was not un­der­pinned by any logic and too fren­zied to be well thought out, and that debt lev­els were out of con­trol.

I am a vo­cal critic of many things. This time I am go­ing to push the en­ve­lope by test­ing the li­a­bil­ity clause that most as­set man­agers in­clude in their man­age­ment agree­ments, that of “gross neg­li­gence”.

Most man­agers think of the clause as deal­ing with their op­er­a­tional risks and ad­min­is­tra­tive fail­ures. Un­lucky for them, gross neg­li­gence also cov­ers neg­li­gence as far as man­age­ment of port­fo­lios is con­cerned. Man­age­ment in­cludes re­search.

I firmly be­lieve that the blind faith in the Mi­das touch of Christo Wiese made many obliv­i­ous to the ob­vi­ous. The right ques­tions were not asked, the cor­po­rate struc­tures were not an­a­lysed in any great de­tail, earn­ings ver­sus debt cal­cu­la­tions were not done, man­age­ment was taken at its word – all this against a back­drop of mar­ket­ing ex­actly the op­po­site and charg­ing savers and in­vestors for the priv­i­lege. Hence, one can as­sume that mar­ket­ing was at best a mis­rep­re­sen­ta­tion backed by in­com­pe­tence, at worst a false­hood.

Crit­ics will im­me­di­ately ac­cuse me of us­ing this as an op­por­tu­nity to punt pas­sive as­set man­age­ment or in­dex track­ing.

So, let me de­clare my vested in­ter­est, backed by my core be­liefs, backed by 24 years of ob­serv­ing the as­set man­age­ment in­dus­try, and shared by War­ren Buf­fett – I do not be­lieve that ac­tive as­set man­age­ment adds value com­men­su­rate with what is be­ing charged to in­vestors. Net1, ABIL, Stein­hoff — the land­scape is lit­tered with as­set man­agers miss­ing the ob­vi­ous. If there are any eth­i­cal as­set man­agers out there who be­lieve in their own skills, right now is the time to prove it — please use some of the per­for­mance fees you have levied in the past be­fore de­stroy­ing value for in­vestors to com­pen­sate them for the re­cent de­struc­tion.

I chal­lenge you. How­ever, ask­ing an ac­tive as­set man­ager to put his hand in his pocket is like squeez­ing blood from a stone — I have seen that per­son­ally in the re­cent past when try­ing to raise money for an­other very wor­thy cause (time will come to name and shame, by the way). The greed is un­prece­dented. As far as I am con­cerned the time has come to pay the piper.

Writ­ten by Magda Wierzy­cka (Chief ex­ec­u­tive of Syg­nia As­set Man­age­ment) in her per­sonal ca­pac­ity

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