Peter Brooke 00:00
Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 26 of 2023. There's a lot on the go: do we talk about the extraordinary events in Russia, or the good news on the Naspers Prosus restructuring today? However, I really want to talk about Steinhoff because it marks an end of an era. The recent approval of the restructuring plan will result in their official bankruptcy, and delisting. As a result, another set of shareholders will lose all their money, this time with 100% decline, compared to the 95% fall in 2017. One of the great mathematical lessons of investing is that percentage declines take no notice of the previous big falls.
Peter Brooke 00:48
And Steinhoff must rank as one of the greatest investment lessons for South African investors in the last 20 years. And I want to share some of my learnings from that, although I'm sure I'll miss a lot. The first lesson is a surprising one. You can make a lot of money out of a fraud. And this is the same as investing into a bubble if you're in early enough. The first big position in our funds was after the global financial crisis when Steinhoff was trading below R10 a share.
Peter Brooke 01:20
The second lesson is there is opportunity in between the gap assets. We were very early buyers of convertible bonds, which didn't fit into pure equity or pure bond mandates, which created this opportunity. We bought big positions in the first two Steinhoff convertibles, which went on to make returns of more than 150%. Luckily, the subsequent issues were unattractively priced, so we didn't buy into them, as a convertible bond typically has a five-year term.
Peter Brooke 01:49
The third lesson is to take good notes. Write down what management said and then check against it in the future. In the early days of Steinhoff's acquisition strategy, they'd bought a small cap, which they said was an amazing deal. Two years later, when I asked them about it, they dismissed it as rubbish and inconsequential as they've moved on to bigger things. For me, this was one of the first indicators of poor capital allocation.
Peter Brooke 02:18
I think this flows into the fourth lesson, which is about trust. Despite suspicions, analysts were lulled into a false sense of security, partially through charisma, being made to feel insiders including extravagant trips, and then the lure of success. The trappings of wealth and power suck people into believing the story, racehorses, and airplanes. So, sometimes maintaining your distance can give a better perspective. Be skeptical, verify the facts. Don't be sucked in by charisma. CEOs are paid to be convincing.
Peter Brooke 02:53
The fifth lesson is around accounts. I remember Brian Pile poring over the cash flows, and they just didn't add up. And that's what Ian Woodney said, is you must follow the cash flow. They always paid scrip dividends and had a voracious appetite for capital, which is a warning sign. Kevin Osborne said that complex adjustments are a warning sign compared to simple accounts. One thing that was interesting was that the quad screens didn't pick up the problems. And that's because they rely on published accounts being correct, which was not the facts in this case. As a result of these accounting issues, we had a negative theme on, and that's just the simplicity of our philosophy is it's we have used theme and price and we had on a negative theme for aggressive acquisition strategy and poor accounts. And that pushed us into a deteriorating theme and made us suspicious.
Peter Brooke 03:48
And that bleeds on to actually the sixth lesson, which is it is always easier with hindsight. Markus Jooste sucked in value managers, growth managers, quality managers, maverick investors like Christo Wiese and Jannie Mouton, in fact, much of South Africa. There were always some doubters. But I was lucky to work with Arthur Karas and he put together a presentation in 2012 explaining why he thought Steinhoff was a bad investment. We had a really big stake at that time because of the convertible bonds. But from that point, we were only ever sellers. We started selling in 2014 on the back of the JD concerns at a price of just under R55. But early, but with hindsight sensible. The main selling was in 2015, at an average price of R79. We then got sucked into maintaining a small position after they bought the Pepkor business because we really liked that business. But we started sending again in early 2017, leaving less than a half a percent of fund. On the announcement of delayed results, we sold the last shares at R56. Where there's smoke, there's fire. What's interesting is going around the office today, speaking to young analysts who didn't live through the Steinhoff events. The legacy is one of mistrust. Don't trust what you read in the papers. Don't trust accountants. Don't trust management. As Markus Jooste ponders time in jail, he should think about William Shakespeare's quote. "No legacy is so rich as honesty." I hope you enjoyed this perspective. Until next week.