Once bitten, twice shy for Coronation after Steinhoff bloodbath
Coronation, whose losses from the retailer's share price collapse spread across 11 portfolios, has vowed to exercise greater scepticism
Coronation, bloodied from a R14bn loss on Steinhoff, was applying a "higher level of scepticism" to its investment approach, CEO Anton Pillay said on Tuesday.
"Investors’ best defence is to increase the level of scepticism and to understand the ways in which these bad actors can deceive governance structures," Pillay told Business Day, following the announcement of Coronation’s financial results for the six months to March 2018.
The asset manager, one of the country’s largest, continued to suffer outflows from its retail and institutional funds over the period but at a slower rate.
Coronation’s losses from Steinhoff’s share price collapse spread across 11 portfolios.
Fund managers across SA suffered hard knocks to their portfolios in December, following the collapse of Steinhoff’s stock. The counter lost more than R200bn in value within days of admitting to accounting irregularities and announcing the departure of long-time CEO Markus Jooste.
Coronation held 5%-6% of Steinhoff in early December, which translated into 2.3% of its assets under management, said Pillay. By the end of December this holding had fallen to 0.2% of its assets, due to the fall in Steinhoff’s share price. Most of the Coronation funds that held the stock outperformed their average competitors for the 12 months to December 2017.
Coronation had decided to stay invested in Steinhoff and had been interacting closely with the new board to ensure "accountability is felt across the group", said portfolio manager Neville Chester.
It planned to take legal action against the company.
Following the Steinhoff collapse, Coronation had "reinvestigated" other companies that had raised red flags, such as those that were highly acquisitive or heavily indebted, Chester said. "We ended up feeling a lot more comfortable that we’d done additional checks post Steinhoff," he said.
Coronation was again looking closely at company boards to ensure they were as strong and independent as possible, Chester said.
Pillay said it would also support the forced rotation of companies’ audit firms, known as mandatory audit firm rotation.
"Mandatory audit-firm rotation will introduce a higher level of independence," he said.
New auditors were more likely to discover flaws in a company, as they tended to ask more questions than the incumbents to get to the bottom of why companies did things in certain ways, Chester said.
"The current Steinhoff crisis was a learning [curve] that we would have hoped to avoid, having had a healthy level of scepticism throughout and having conducted an enormous amount of independent due diligence," chief investment officer Karl Leinberger wrote in the January issue of Coronation’s Corospondent newsletter.
"Despite this, in the end we still got it wrong. Although errors are part of the investment process, this one is hard to stomach. The failure of the board and the company’s independent auditors to identify what is at least two years of misstated financial statements is frustrating. It is mystifying that so many smart insiders, who, by definition, had better information than outsiders, were so heavily invested in the company and so blindsided by recent events."
Coronation was in the process of completing a "legal due diligence", which would inform what legal action it would take against Steinhoff and in which jurisdiction, said Pillay.
This was being done to "protect the interests of our clients".