It is no surprise that the collapse of the Steinhoff share price was an uncomfortable end to what was looking like a strong year for fund managers.
Steinhoff was very widely held in equity unit trusts; at a peak market cap of R290bn it was by far the largest retailer on the JSE, with strong rand hedge assets such as Conforama in France, Pep Europe and Poundland in the UK. The former CEO, Markus Jooste, was a regular visitor to the fund management houses. In his mock humility he would ask for "just a hamburger".
According to research house Morningstar some of the largest holders were Old Mutual Top Companies (6.5% of the portfolio), Coronation Houseview Equity (6.4%) and Truffle General Equity (6.4%).
Nedgroup Value, which is run by Foord Asset Management, held 6.2%. Amex, through Nedgroup Rainmaker and Opportunity, also held large Steinhoff holdings.
The Truffle fund managers had to cancel their Christmas holidays and start aggressively schmoozing clients.
They don’t have the benefit of slick business development managers in shiny suits who do that for a living.
Foord, which traditionally adopts a take-it-or-leave-it approach, wrote an open letter to clients. Founder Dave Foord says he was attracted to Steinhoff as it has no correlation to other JSE-listed shares.
The company bought into the share at an average price of less than R25/share, but allocated most of the share to SA-only equity funds. Surprisingly, Foord says it still has confidence in the underlying management teams. He has not sold any of its Steinhoff shares, as even at a hefty discount its valuation is still well above the current share price.
Neil Brown of Electus had a middle-of-the-road 2% exposure to Steinhoff in the Nedgroup Growth fund, which he manages.
He disposed of the share at an average of R40 over the three days after the announcement of Jooste’s resignation.
Many of the shares were bought in 2013, when the price was R25. Brown says Steinhoff has some good assets such as Steinhoff Africa, dominated by Pepkor and its PSG shares, but he is keeping out of the Frankfurt-listed holding company for now.
Head of Sanlam equities Patrice Rassou says the group’s exposure to Steinhoff instruments largely reflects Steinhoff’s weighting in the local investment markets and Sanlam’s size as an institutional investor.
The group also has Steinhoff equities as partial collateral for some loans granted by the collateralised lending business, housed in Sanlam Capital Markets.
Sanlam will take a maximum hit of R175m on the net investment return, but if the Steinhoff share price goes down to zero it could lose R580m on the collateral loan security.
It’s always asking for trouble when a fund makes a big promise in its name. And the SIM Top Choice Equity fund had 6.5% exposure to Steinhoff.
Top Choice sounds like a dog food, so maybe it’s appropriate. Without Steinhoff the fund would have had a good year, and its 11% return over the past 12 months was still five percentage points behind the all share index.
Rassou says that as long-term value investors, Sanlam saw a potential upside value in Steinhoff that compensated for the financial risks. It assumed a sharp increase in the low tax rate, for example.
But of course the financial analysis and forecasts were based on incorrect data.
There is an information vacuum, but this should change once new Steinhoff management is brought on board, and the business is broken up and
simplified.
Sanlam has now reduced its Steinhoff holding to around 1% of its funds.
Few fund managers have the courage to buy Steinhoff, even at R6.50. One who does is John Biccard, manager of Investec Value, which since the beginning of December has increased the Steinhoff weighting from 0.5% to 2.5%.
"There is talk that this is a fraud along the lines of [that of] the US energy group Enron," he says. "The difference is that nobody ever really knew how Enron made its money, while Steinhoff is made up of retail operations selling everyday consumer goods."
Biccard says that even if the accounting fraud has led to a R120bn hole, Steinhoff is still worth R29-R35/share — conservative, considering the break-up value. He is confident that Pep in SA, as a clean cash business, is still worth R50bn and the businesses that clone the formula, such as Pepco in Europe and Poundland in the UK, are of a decent quality. The French Conforama chain is second only in value to Pepkor.
The weak link, he says, is Mattress Firm in the US, which is worth about half the $2.5bn Steinhoff paid for it.
Biccard admits that there will be a binary outcome — either shareholders will lose all their money (they stand behind debt holders in terms of liquidation rights) or investors will triple their money.
It was not just SA fund managers who got taken in by Jooste’s silver-tongued house of cards. Funds with no specific SA bias, such as the Oppenheimer and Transamerica Developing Markets funds, had a 1.5% weighting. The grandly named Samsung Emerging Dynamic Master Equity fund had nearly 2% in Steinhoff. The Fidelity Emea (Europe, Middle East and Africa) fund had a huge 6.5% exposure — what could go wrong with the world’s second-largest furniture retailer? The Eastspring Investments-Emea Dynamic Fund had more than 3% of its fund invested in Steinhoff even though, until recently, it was run by the Cape Town-raised Graham Mason, who was the former head of Prudential SA and would have known Steinhoff inside out.
Steinhoff had been one of the winning large caps on the JSE.
A classic momentum share that made a u-turn. In spite of its collapse the JSE’s shareholder weighted index still made a solid return of 21.2 %, driven mainly by Naspers and Richemont. The debacle shows that fund managers will need to improve their risk management practices even if they can’t insulate themselves entirely from fraud.
cranstons@fm.co.za
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