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The largest corporate failure in the asset management industry yet

The greed is unprecedented – Magda Wierzycka.

The failure of Steinhoff has shocked even the most seasoned asset managers. It is the biggest corporate failure on the JSE. Allegations of earnings manipulations, uncontrolled acquisition sprees and tax fraud are just the tip of the iceberg. Off-balance sheet companies were set up to hide losses, executives collaborated with each other to defraud investors, and debt was taken on at a massive pace. The warning signs were all there. The most obvious of those was the cynical move by shareholders in PSG to, in a sleight of hand, swap their shareholding in PSG shares in South Africa for a suddenly-Frankfurt-listed Steinhoff, thereby externalising their wealth without the need for foreign exchange control approvals. This alone should have been a strong indicator that one is not dealing with pillars of society. Many names are implicated. Many more will follow.

The serious question to ask is how so many active asset managers in South Africa missed this. Priding themselves on meticulous research, scrutiny of balance sheets and income statements, backed by interviews with management,

they should have seen what was obvious from the beginning that this was as close to a corporate-structured Ponzi scheme as one can get. 

When I looked at the financials of Steinhoff (not my day job, by the way) I had another Net1 moment – it took me exactly half an hour to figure out that the structure was obfuscated, that financial items made no sense, that the acquisition spree was not underpinned by any logic and too frenzied to be well thought out, and that debt levels were out of control.

Listen: Magda speaks to Warren Thompson on the Moneyweb at Midday show on Thursday

I am a vocal critic of many things. This time I am going to push the envelope by testing the liability clause that most asset managers include in their management agreements, that of “gross negligence”.  Most managers think of the clause as dealing with their operational risks and administrative failures.  Unlucky for them, gross negligence also covers negligence as far as management of portfolios is concerned. Management includes research. I firmly believe that the blind faith in the Midas touch of Christo Wiese made many oblivious to the obvious. The right questions were not asked, the corporate structures were not analysed in any great detail, earnings versus debt calculations were not done, management was taken at its word – all this against a backdrop of marketing exactly the opposite and charging savers and investors for the privilege. Hence, one can assume that marketing was at best a misrepresentation backed by incompetence, at worst a falsehood.

Critics will immediately accuse me of using this as an opportunity to punt passive asset management or index tracking. So, let me declare my vested interest, backed by my core beliefs, backed by 24 years of observing the asset management industry, and shared by Warren Buffett – I do not believe that active asset management adds value commensurate with what is being charged to investors. Net1, Abil, Steinhoff – the landscape is littered with asset managers missing the obvious. If there are any ethical asset managers out there who believe in their own skills, right now is the time to prove it – please use some of the performance fees you have levied in the past before destroying value for investors to compensate them for the recent destruction. I challenge you. However, asking an active asset manager to put his hand in his pocket is like squeezing blood from a stone – I have seen that personally in the recent past when trying to raise money for another very worthy cause (time will come to name and shame, by the way).  The greed is unprecedented. As far as I am concerned the time has come to pay the piper.

Magda Wierzycka is the CEO of Sygnia.

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And to me this goes even deeper when Mr Wiese was caught smuggling a suitcase with £600k (appr R11m) at Heathrow Airport. When a so called business tycoon is caught with cash like that “trying to balance his investment (read tax evasion) portfolio” then he is immediately relegated to the Bernie Madoff and others of their ilk. I am not sure what is wrong with a swift or eft transaction but that is just me.
He and other are arrogant to the point of believing they walk on water. Koos Bekker is another tin pot that thinks we are pre-1994 and they “run” the country.
More to follow on this – watch this space.

everyone, including me, forgot about this incident. Hope Ryk will take it further.

Steinhoff, under the leadership of Jooste, is said to have deliberately withheld important information from investors for about R13.5 billion worth of transactions with a related company, despite laws stating that it is required to divulge financial dealings with related companies. It is an example of the white privilege.

If we want corruption to be controlled, we need greater transparency, accountability, enforcement, and self-governance. All these are quite difficult to achieve, but definitely not impossible. The slippery slope of corruption has a powerful downdraft where the weak and the honest suffer the most. Let us hope that this election brings out a leader who will wake up to fix the broken window of corruption.

This comment reads like an Enid Blyton Noddy story……………..with the difference that it is libelous. Note there currenty at least 101 Noddy book readers on Moneyweb

Wiese got all his money back ?

Brilliant and accurate statement from this lady!

“The serious question to ask is how so many active asset managers in South Africa missed this. Priding themselves on meticulous research, scrutiny of balance sheets and income statements, backed by interviews with management,”

Says everything about the industry, Foord, Sanlam Old Mutual Investec-many of the big names-proven to be grossly incompetent

Another pathetic hindsight trader. Well did you see this coming? Index funds are forced to invest in Steinhoff because it is in the index so there are automatically exposed to Steinhoff. Large active managers generally run over- and under-weight position so they are likely to have some exposure. That is how investing, at institutional level, works. Anyone who thinks fund managers are mistake free does not understand institutional investing. In fact research shows that fund managers who get 55% of their stock calls right are top quartile managers.

I have active and index retirement funds. None of these retirement fund portfolios had more than 2% in Steinhoff. Diversification is key.

And in my discretionary investments portfolio, of which half is Satrix Equally Weighted Top 40, again Steinhoff was under 2%. The other half of that portfolio, is in Satrix MCSI World Index, and even mighty Apple weighs less than 2% in that.

So nothing wrong with index funds, there are many index funds to choose from to suit your outlook.

What a weasel attitude; I shall look out for your name and avoid you like the plague.

Well done Magda; showing yet again you are a person of great perspicacity, sagacity and courageous to boot!

Magda says it how it is.
I just love this woman! – she has the balls to speak out about the stellenbosch mafia – now just for the rest of the gang to come tumbling down

“et tu” Magda Wierzycka, you are in business as well. We watching you too.

Magda, where were you years ago when the Steinhoff allegations first emerged? And why do you still hold Steinhoff in your active funds? If it was so bleeding obvious, why didn’t they sell out? #glasshouses

It is easy to hide behind an index. After your half hour research you obviously shorted the stock in your own capacity but yet bought Steinhoff for your clients in the trackers funds “because it is in the index” and that is “not your fault”. Your article is the very argument why passive funds are flawed.How do you justify holding a stock on behalf of clients that was “obviously a Ponzi scheme”

You clearly did not think this article through. We look forward to you repaying your clients our fee for holding a stock you knew was a fraud

Well, the REAL culprits are the active managers, they cause Steinhoff to be in the index afterall, by buying Steinhoff equity. If it was only retail investors and small boutique firms in Steinhoff, it would not have been in the Top 40 and just have been a small cap, forming very a small part of the ALSI.

The index is the index, how you use it is what is important. It’s like water, it there, it’s a fact, what you do with it is up to you.

Perhaps Naspers is next?

With Koos Bekker’s arrogant attitude it is altogether possible.
So bye bye WMC – it is all about to evaporate.
Not quite sure what Andile and Gupta/Zoomba are going to blame their incompetence on when most of the serious WMC has disappeared.

When are these business men going to learn there is no place for arrogance in SA….!

I find it surprising that this article is silent on Sygnia’s own ACTIVE fund’s exposure to Steinhoff, notably the Sygnia Growth Equity Fund, in which Steinhoff is a top ten position: https://www.sygnia.co.za/docs/default-source/individuals—fund-fact-sheets/unit-trusts/2017-oct-sygnia-growth-equity-fund.pdf?sfvrsn=56

Surely Magda at least takes a couple of hours a month to review the top holdings and discuss these with the portfolio managers? After all, it only took her half an hour to uncover the issues at Steinhoff.

Also, given Magda’s “core belief” that active asset management doesn’t add value commensurate with the fees charged, why does Sygnia continue to offer actively managed funds at all?

Magda thinks Moneyweb readers are dumb, talk about making a fool of herself.

At 3.9% for the fund invested in Steinhoff, it’s not big exposure is it? Or am I missing something here?

Well spotted. Sick and tired of Magda getting free publicity in media by spreading half truths

@ Conroy, I’m on the SYGNIA mailing list and they just released the numbers about their exposure to SNH. (It’s clear they sold most of their shares just before things went down.

The highest exposure of actively managed funds was approx. 2.2% (Value Fund), then 0.8% (Growth fund).

Most funds had between zero exposure and 0.5% exposure.

@Kevin R, bear in mind this is the estimated exposure on a fund level after the share price collapse (07/12/2017). It doesn’t necessarily mean they sold out before the fall.

what is the difference between Mr Wiese, Mr J Zuma and the other Steinhoff board exectuvies?

I nearly thought you were going to say Who is the odd one out???
Only Zuma is not part of WMC

Zero! They should all be treated with the same contempt.

The one is a corrupt government official stealing tax money and destroying a country. The others are private businessmen losing their and shareholders money. The one is a shameless arrogant government official who refuses to accept liability and corrupted a country to avoid prosecution and the others businessmen who have at least had the decency to resign, admit the wrong and/or lost a few billion of his own money and may likely be prosecuted. You should read less ANC and SACP propaganda and more economic books.

what makes you think i read more of ANC and SACP propaganda and less of economics? thats an unqualified assumption you making there. what have the people who have read tonnes of economics and financial books done when such a Steinhoff scandal happenned under their nose and watch? seems very few people know how to analyse these financial statements, you included. so with all due respect stop patronizing me.

Flawed thinking…government money and shareholders money are the same thing..these people all lost our money, private business man private money my foot! they are all costing us.

Zuma is using taxpayers money, the others are using shareholders money

Taxpayers money == Shareholders money == Other people’s money; where ‘==’ denotes ‘same as’.

Zuma has a much higher responsibility – his actions affect a greater number of people, and a greater number of future generations than the rest.

Big difference: Jooste apologized to his staff and shareholders and admitted wrong-doing. This is something Zuma is incapable of doing.

My gut feel is this is only the tip of the iceberg. How many other companies on the JSE are also involved in these fraudulent activities? As investors we are losing all our saving on this hive of corruption we call the JSE! Why isn’t the JSE protecting us from these unscrupulous scumbags running there scams?
People say bitcoins are used by criminals!!?? What the hell is Steinhoff then? And they come fully endorsed by the JSE!!! This was pure fraud and nothing else. Now we hear NASPERS owned multichoice is also involved in possible bribing and corruption with the Guptas and government. Yeesh!!!

Please investigate the JSE! This fraud and corruption of companies on the JSE is out of control and causing us to lose too much!

Then don’t invest in the JSE and you won’t loose anything in the companies on it.

That’s the difference between government and corporate corruption and financial trickery and waste and fraud, government forces you to pay tax, and sends you to jail if you don’t. With corporations you can choose to invest your money in them and even with who out of the many.

This has the same smell as Tollgate – remember Tollgate. That indeed was an exercise in obfuscation and dishonesty.

One Christo Wiese (and friends) was intimately involved and had a lot to say about the ethics of all concerned and how they did not need the likes of Julian Askin in South Africa. Well it appears that the wheel has tuned and so has the worm.

Money in suitcases, disregard for rules and regulations.

Bye Bye Christo.

Even if you went the passive route, also some Steinhoff in Satrix

Naspers has been doing the same for many years

They can thank their lucky stars that the success of Tencent came along to bail them out

do you then think NASPERS will not reach its support level of about 2600 if their Tencent portion stays stable?

Hahahaa….is that the level where you want to see it trade?!?

Hope not…then my SATRIX PORTFOLIO is na moer.

“The most obvious of those was the cynical move by shareholders in PSG to, in a sleight of hand, swap their shareholding in PSG shares in South Africa for a suddenly-Frankfurt-listed Steinhoff, thereby externalising their wealth without the need for foreign exchange control approvals. This alone should have been a strong indicator that one is not dealing with pillars of society.”

Magda, remind us, but didn’t your former business partner, Mzi Khumalo, illegally and prematurely sell hijacked shares from the botched Harmony BEE scheme and then through a number of complex asset swaps and loan structures illegally move the ill gotten gains offshore, bypassing exchange control regulation and the SARB?
Are any of the windows in your glass house not broken?

I can also now, after the fact declare that I saw right through them. That I spotted misrepresentations in the statements. That I did my due diligence properly unlike all the others, when in fact I ran out of money before I could buy Steinhoff. My level of poverty, and not my intelligence, saved me from this disaster.

We should not confuse luck with skill.

The problem is we rely on CA’s acting as auditors to verify and confirm the financial position of these entities. We trust that they are competent and telling the truth. The real truth is that we are fools to make investment decisions based upon their trustworthiness

“The problem is we rely on CA’s acting as auditors to verify and confirm the financial position of these entities.”

Don’t I have stories to tell

But..what I have been thinking lately is that IRBA has to separate itself completely from SAICA, people should go to school to become RA (Registered Auditors) just like it is the same with Internal Auditors, independent completely, not accountants and then a Registered Auditor. The way it works now where one has to be a CA to be an RA doesn’t make sense, it’s just not justifiable.

Until then, honestly IRBA is the same thing as SAA, Eskom en hulle.

I think every article clerk will have a fair share of stories to tell about what really goes down in a audit firm, I remember a specific attorney I audited, while reviewing the trust account movements I picked up payments made from one trust account to employees… I played dumb and asked the accountant what it was… she said in her exact words “we do it this way to avoid paying tax on our bonus” … obviously I reported this to the partner on the audit… obviously the annual audit fee was worth way more than reporting this to the correct authority.. nothing ever happened.

Completely lost my respect for that profession, went the CIMA route instead and never looked back.

That is probably why a set of audited financial statements means nothing, you need to see the history of the teams that performed the audits, especially with regards to the partners involved. The same partner auditing a firm for multiple years? Problems coming.

Generally agree with your views.

One day we should swop stories; most anyone who has worked with CAs will have some horror ones to tell.

The serious question to ask is how so many active asset managers in South Africa missed this……the serious question is HOW WIESE MISSED THIS?????

Who says Wiese missed it?

I says so……I do not do the audit or book keeping of my business but still knows EVERYTHING that goes on.

or are you implying he knew what was going on and missed it on purpose ?

Wiese misses nothing. He gives the orders

ok, got you. What do you think will be his next move? also check out 1st comment from Gill. I think even Wiese forgot about this incident…didn’t think it will come back to haunt him.

I am quite sure the astute ego knew exactly what was going on. Markus worked for him. Wiese is often found behind corporate shenanigans. I am quite sure there are a number of other luminaries in the frame as well. It will all come out – always does.

Magda, time for YOU and SYGNIA to walk the talk. How much of Sygnia’s 2017 revenues were from asset management (incl. performance fees), administration and stock broking fees from active funds, hedge funds and multi managers funds at Sygnia? I’m guessing over 50% of Sygnia’s revenues come from these sources that you say “I do not believe that active asset management adds value commensurate with what is being charged to investors”. If you are as principled and transparent a person as you make out in the media, will you disclose this number? Also, will you inform all Sygnia clients invested in Sygnia’s actively managed funds to disinvest from those funds or will you just close them down as they destroy value and are run by greedy people?

They just want the money without the governance or accounting (which they think just gets in the way of a good story).

Waiting for the Naspers quasi-pyramid scheme to fall. Tencent is the cement holding the bricks together…just

Magda – your hands are not clean, so its easy for you to throw mud. Why not look at the log in your own eye? If you are to believed, you were one of the few people who saw through Steinhoff, and based on your say-so you probably did it in record time. With who did you share this knowledge? Why did you not warn the investment community? Its easy to speak now Magda. In my book you’re just playing another age old game: polishing your own image.

Please feel some pity for poor investors in the Nedgroup range of funds. After suffering under Piet Viljoen’s disastrous management, the fund manager was changed to Truffle late last year.
Guess who had the largest exposure to Steinhoff? You guessed it… Truffle Management!! Oh vey… time for index investing.

If their spate of bad luck continues like this, the moment they buy the index, Chinese authorities will arrest the CEO of Tencent for the “corruption” at Naspers and that will crash Naspers, taking the index down by 50%.

Truffle…trough…? Well I thought Truffle was supposedly this super duper asset management business. Well well well…

They are clearly mickey mouse…………so much for boutique funds. BS.

OH NO!

What is the % of Steinhoff held by Managed Fund Nedbank.

Half an hour to figure out … structure obfuscated, financial items made no sense, acquisition spree not underpinned by logic, too frenzied to be well thought out, debt levels out of control.

Brilliant Magda. I even had to look up obfucsated. Keep an eye on your Inbox, you’re getting a first class flight to Frankfurt, private jet to Bremen and whisked to Oldenburg. The prosecutors there are going skiing for a weekend; they believe you’ll have everything figured out when they return.

What wowed them the most, this isn’t even your day time job.

Hahahahaha are YOU serious? How much SNH did YOU own on behalf of YOUR clients in both YOUR active and passive funds?

It makes me think of Arthur Brown, who suddenly became an investment guru.
Or Neil Froneman, with Afrikander Lease and Uranium One.

I do not believe that active asset management adds value commensurate with what is being charged to investors. Net1, Abil, Steinhoff – the landscape is littered with asset managers missing the obvious.

Ok so what about the 99% of times that companies do not go bust. What do you think that will happen in a world where there are no active managers? Do you think the failure rate would be that low? In a world where companies just raise capital and passive investors like yourself merely hand over money without doing any research – do you think we will have less corporate failures. You are a highly intelligent woman Magda so you know the answer. A market without active managers, doing proper research, is the market for Bitcoin or the market for tulips in 17th century Holland. The reality is that passive managers are parasites that piggy back for free on the work done by others.

It is due to skeptic fund managers that Steinhoff has always traded at a discount to the market – which drove the weighting of Steinhoff lower in your passive portfolios.

The next bubble will be driven by passive management. Passive money flowing into a market where price discovery is done through an ever dwindling number of active managers is a recipe for disaster.

I think it is time that Magda discloses how much advertising she buys from moneyweb, the FM, Fin24 et al

You’re a genius Magda. However it doesn’t take one to write a ‘I told you so article’. You also overlooked one finer detail. Your passive funds all have exposure to Steinhoff too.

As is the nature of passive funds and how it should be. FI you go start making changes on your feels about a specific company, then it’s not a passive fund any more, obviously.

100% correct Supersunbird. That’s what an INDEX fund is all about….it tracks the index, and Steinhoff is part of the index. So nothing wrong with the fund mandate.

Funny how proponents of Index/EFT funds that hammer ONLY on the subject of cheaper % fund fees, now suddenly they want to have their cake and eat it…being that an index fund is now expected to be cleverly managed to avoid Steinhoff mishaps.
(OK given…actively managed funds with higher fees, also did not see that one coming 😉

Everything is obvious in hindsight. Nobody is an oracle. Not even Warren Buffet. These things happen. That’s why you should always diversify

Good for you Segoe; in all the self righteous blather few have remarked on this.

I could never understand the reaction of dogs. When one dog gets injured, the other dogs will attack it and try and kill it. They turn on their own when the victim is in shock. When a dog is traumatized by and event that injured its compatriots, it’s immediate reaction is to bite the injured dog.

Magda Wierzycka basically does the same. Now I forgot the term for a female dog…..

I’ve said it before and I’m going to say it again; this woman needs to stop talking.

Her severely over-inflated ego is going to cost her dearly one day.

Hush woman, hush!

Stop and think for a while.
What is the limited actual, real facts currently available about the Steinhoff saga?
What has independently been verified and stated about Steinhoff?
Very little indeed.

Till such time as the facts come to light, the comments seems like a lot of deductions, a lot of speculation and a lot of unsubstantiated innuendo.

Even if all the speculation comes to fruition and even more than that, I still don’t see that the fair value of the sum of all the parts of Steinhoff can be as low as the current share price dictates as at 7 December 2017 (around R10 to R11 per share).

Uncertainty, over-reaction fear and unsubstantiated speculation always have the effect of the market initially over-reacting and over-selling a share. It will take some time, especially due to the upcoming festive and holiday season, before the actual facts emerge.

Till then it’s probable best to do nothing about any exposure to Steinhoff. Only with time will we become wiser in this matter.

Warren Buffet promotes holding on or even buying when the blood is in the streets and everyone else is selling and running.

That’s what I been saying and frothing about the past 2 days.

Regretfully though this is going to be a bloodbath.

The only problem here is Steinhoff has so much debt – it is almost like a bank. You run out of liquidity long before you go insolvent.

So one can go bottom fishing and end up being diluted with a hugely discounted rights issue.

All so easy in hindsight! Go onto YouTube & search Steinhoff to look at all the thumbs up given to Steinhoff up until Friday last week. I’m not an analyst but when I saw this group was buying everything & anything -warning signals went up. I have previously warned @magda to keep to her job of looking after clients money & not wander into the public arena. She is the worst type of WMC – a high profile WMC!

Who were the auditors and why did they not pick this up ?

Being in the Corporate field for many years the audit partner goes for golf / or for a three hour liquid lunch with the bosses while first year interns audit the books asking you irrelevant questions working from previous years workpapers.

Another B r r r illiant response.

This is pretty much spot on for the corporate world big 4 audit firms.

It is the 1st and 2nd years that do most of the work with an occasional show by the “senior”.

Partner rocks about……………….never.

The words in the article caught my eye “Off-balance sheet companies were set up to hide losses, executives collaborated with each other to defraud investors, and debt was taken on at a massive pace.” I am just wondering ….isn’t this exactly what banks are doing by creating these “off balance sheet companies” . They have written off bad debt and shown these figures in their balance sheets. Then they create off balance sheet divisions which are then working on these written off Billions – the question arises – do they declare this income (which will be everything they recover) to the Shareholders or the receiver of Revenue. These vehicles (SPV’s) buy the debt at a fraction of their value and they recover Rmillions which should be going back to the original shareholders …….Nice scheme(scam?)

You touch on a very interesting topic here. Moneyweb should actually take this up. This will lead to very interesting views from the commentators!

Personally I’d define gross negligence as having 25% of my investors money in one internet stock which has 100% exposure to the Chinese communist government

To those who want to deride indexes, and those going on about Steinhoff in index funds, and a bit of Napsers thrown in for those who thinks it’s too big.

Which index are you deriding? There are many.

Naspers is big on even the Satrix ALSI at ~17% and obviously the Top 40. Steinhoff wasn’t even at 2.46% of the Satrix ALSI and on the Satrix Top 40 wasn’t in the top 10 of that either and thus somewhere under 2.46%.

Naspers and Steinhoff isn’t even in the Top 10 of the Satrix Top 40 Equally Weighted fund (both must thus each be under 2.57% of that index).

And lets not even go into index funds that track the S&P500 or the various MSCI indexes where those 2 companies are specks of dust, if they are even on there.

So you need to be very specific about which index you want to deride, or else keep quiet.

*The above uses 30 Sep 2017 figures

Thank you for a good (and brave) article. Regarding Steihof in an index tracker fund – well it MUST be there otherwise it is not an index tracker.

How much exposure does Sygnia funds have to Steinhoff?

Jooste has since unceremoniously resigned, along with another tainted CEO, Ben la Grange of Steinhoff African Retail (STAR) one of Steinhoff subsidiaries which has a significant stake in Shoprite. It is to be confirmed if these R13.5 billion financial transactions were between these two entities, however what is clear is that the narrative and the way the story has been developed reeks of white privilege.

Anyone look at KAP recently? Doubling of debt to finance aquisitions.
Obscure reporting in the industrials segment? Loss making Vitafoam for
years hidden in consolidation? Debt:EBITDA not so healthy anymore. How
many CA’s on the board? How many went to school at Steinhoff? Remember
the day….

Some of the things I have seen at Sygnia give me that same feeling Magda.

I have high regard for Magda’s opinions, but I am of the opinion she hasn’t done enough research herself.

“Allegations of earnings manipulations, uncontrolled acquisition sprees and tax fraud are just the tip of the iceberg. These are only allegations – so far. Their is no substantiation for this – yet.

When business take-overs take place, Assets and Liabilities must be valued at market value at the time of acquisition or fair value determined through Nett Present Value minus cost to purchase, in the case of Assets. Depreciation must be determined on this new value and then the depreciation calculated pre acquisition, deducted. The deferred taxes are then calculated on these different values. This is according to my understanding of International Financial Reporting Standards (IFRS).

Has she gone through each and every acquisition that Steinhoff has made since inception and come to the conclusion, there was fraud, whether it be overstatement of Assets and/or Income Tax fraud. I doubt that.

Until we have clarification from the German authorities, who are currently investigation this scenario, Steinhoff and the Board, together with the Finacial Director is not guilty until proven guilty.

Thank you.

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