Article courtesy of: Hywel George
Director of Investments: Old Mutual Investment Group
On Tuesday evening, 5 December, Steinhoff announced the resignation of its CEO, Markus Jooste. The Steinhoff share price fell 61% on Wednesday alone. In a statement, the company said that “new information has come to light today which relates to accounting irregularities requiring further investigation. The Supervisory Board, in consultation with the statutory auditors of the company, has approached PwC to perform an independent investigation.”
Unfortunately, Steinhoff shareholders have little insight as to the potential materiality of these issues and are reliant on the public statements issued by the company. This vacuum of hard facts massively fuels market speculation. We don’t intend to add to this speculation and instead aim to carefully chart our way through the noise. The share price has fallen significantly on the back of the latest announcement, which is understandable given the uncertainty, fear and forced selling by some due to debt or derivative structures and more.
Exposure within our multi-asset class funds
While we own some Steinhoff shares within these funds, MacroSolutions has consistently been a net seller over the past couple of years. With an investment philosophy that looks at both “price” and “theme”, the fund managers believed the price was cheap but the theme was poor. The reasons for the poor theme score were primarily around the aggressiveness of Steinhoff’s overseas expansion strategy and the impact on their balance sheet.
As of 30 November, our flagship multi-asset class funds with exposure to Steinhoff were Old Mutual Flexible Fund, Old Mutual Balanced Fund and Old Mutual Stable Growth Fund. In aggregate, we held an underweight position in the company. Following the significant drop in the share price, fund returns were negative on Wednesday, but remain well up year-to-date. This highlights the power of diversifying across asset classes in navigating shock events like this.
Exposure within our equity funds
We also hold Steinhoff in the Old Mutual Investors’ Fund. Based on the most recent audited accounts (Deloitte BV Netherlands) and other publically available information, Steinhoff traded at a significant discount to our valuation. There remains material uncertainty around Steinhoff with limited information available to investors to firm up valuation assumptions. Given this lack of clarity, we will continue to carefully assess our position in the Steinhoff Group.
This has been a seismic event for corporate South Africa, the repercussions of which will reverberate for months and years to come. It has been costly for our clients (even though we were relatively well positioned) and will undermine the reputation of corporate SA domestically and on the global stage. We must all heed the lessons from this most unfortunate event; a vital discussion for 2018 and beyond.
Watch Peter Brooke’s update on Steinhoff’s sell off – what you need to know here.