Who are the real losers?

The implosion of JSE-listed Steinhoff International Holdings NV (“Steinhoff”) has received a significant amount of attention since the spectacular collapse of its share price early in December 2017.

While it’s generally agreed Steinhoff’s legal headwinds will take many years to settle, only time will tell whether shareholders will be able to recover any of the losses that they have suffered. The international flavour of Steinhoff’s operations will further complicate the legal wrangling in the years ahead.

Jaco Pretorius, CEO of Ensimini Financial Services, says while the various investigations, in particular the PwC investigation, run their course, the absence of reliable information on what the actual financial position of Steinhoff is will make it extremely difficult for investors to make informed decisions with regards to Steinhoff moving forward.

He says unsurprisingly, the position of investors regarding what to do with their Steinhoff shares has been varied with much heated commentary between passive and active investors. While passive investors had no choice but to reduce their exposure to Steinhoff, the decision-making by active managers has been much more complicated.

“Investors are generally happy to pay active managers a higher fee to achieve returns in excess of the index. To achieve this, it is assumed that the active manager will research each share thoroughly before buying that share,” says Pretorius.

Pretorius says the drama that unfolded around Steinhoff caused an information vacuum for investors and asset managers as much of their investment decision-making process involves analyses of the company’s financial statements. He points to the announcement by Steinhoff that its financial statements, dating as far back as 2015, may have to be restated. “Effectively this removed the foundation on which much of the managers’ investment decision-making process could be based,” notes Pretorius.

The market saw some active asset managers deciding to exit their positions in Steinhoff, as they were uncomfortable in retaining Steinhoff shares, irrespective of the price. Their rationale was that the financial information at their disposal was now known to be incorrect. The actual levels of debt were unknown and as a result, it was simply not possible to place any value on the business.

Other managers argued that the lack of alternative financial information did not enable them to make a value decision on the share and that it would be irresponsible to transact until they would be able to make an informed decision. Pretorius says one manager even suggested that at current values the share now offers value and that investors should consider increasing exposure to Steinhoff.

“There can be no debate that the biggest single domestic losers from the Steinhoff fall-out this far have been the Public Investment Corporation, who manage the pension funds of government employees and Christo Wiese. Wiese’s total losses are rumoured to be as much as $4 billion and the PIC as much as $1 billion.

Of concern, most South African retirement funds with exposure to domestic equities would have had some exposure to Steinhoff. The investment return earned by members of defined contribution funds that had such exposure would have been detrimentally affected, depending on the level of exposure to Steinhoff shares in the portfolios that their retirement savings were invested in.”

Pretorius says the lessons from Steinhoff are no different from those that get repeated after every major incident in the markets. Trustees of retirement funds are unlikely to ever really be equipped to anticipate, and react in time, to events such as these. History will show that even the most seasoned investors and asset managers were not able to foresee the implosion of Steinhoff. “If anything, it is at times like these that it is critical for retirement fund trustees to ensure that they seek proper advice to help them navigate the murky waters of investment decision-making they are forced to deal with,” concludes Pretorius.