Steinhoff: who are the real losers?
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The implosion of JSE-listed Steinhoff International Holdings has received a significant amount of attention since the spectacular collapse of its share price early in December last year.
Although it’s generally agreed that 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 they have suffered. The international flavour of Steinhoff’s operations will further complicate the legal wrangling in the years ahead.
Jaco Pretorius, the chief executive of Ensimini Financial Services, says while the various investigations, particularly 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 heated commentary by 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,” says Pretorius.
The market saw some active asset managers deciding to exit their positions in Steinhoff, as they were uncomfortable 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 their exposure to Steinhoff.
“There can be no debate that the biggest domestic losers from the Steinhoff fall-out thus far have been the Public Investment Corporation (PIC), which manages 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's as much as $1bn.
"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 are repeated after every major incident in the markets. Trustees of retirement funds are unlikely to 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,” says Pretorius.