What Steinhoff shows us about the dangers of exchange controls


The decimation of the retailer’s share price highlights the risks of extreme concentration of domestic unit trust holdings in a relatively illiquid market.


The 92% collapse in Steinhoff’s share price over the past 3 weeks due to suspected accounting irregularities has resulted in a $16bn loss of market value to the company’s equity investors, many of whom were South African unit trust and retirement fund holders.

This substantial loss highlights a potential significant concern for South African domestic investors – the extreme concentration of domestic unit trust holdings in a relatively illiquid market.

A simple analysis of the disclosed top 10 holdings on the fact sheets of the 10 largest South African pure equity funds, holding a combined $10.4bn of assets, revealed the following staggeringly high levels of concentration by international norms:

  • Every fund held Naspers at an average weighting of 15.2%
  • Every fund held British American Tobacco (BATS) at an average weighting of 7.0%
  • Every fund held Sasol at an average weighting of 4.4%
  • Every fund (except Allan Gray Equity Fund and Satrix 40) held Steinhoff at an average weighting of 4.8%. (Note Bloomberg disclosed Steinhoff as being Satrix 40’s 11th largest position).

On a total asset basis, 29% of these fund assets were invested in a mere 4 companies (40% of the funds were invested in  8: Naspers, BATS, Sasol, Steinhoff, MTN, Standard Bank, Richemont and Old Mutual). These funds held, on average, 57% in their top 10 positions, with one fund having 75% of fund assets invested in only 10 positions.

So domestic investors who spread their investments among the largest equity funds may think they are diversified, but since these large funds own many of the same stocks, only in slightly different proportions, the harsh reality is – they may not be.

To compare this level of concentration on a global basis, it may be useful to note that Apple is the largest constituent in the MSCI World index with a current weighting of only 2.2% and Tencent’s weighting in the MSCI World All Country Index is only 0.64%.

In global equity funds, a 5% position size would generally be considered a significant position size.

UCITS Fund structures are highly regulated and have diversification rules that are designed to protect investors. As such, they are widely accepted by financial regulators globally. Two of these rules are that: no active fund can exceed 10% in each position (including any price appreciation) and that the sum of all positions exceeding 5% cannot exceed 40% of fund net assets.

Three of the 10 equity funds included in my analysis have over 20% of their portfolio in a single stock – Naspers – and it would appear that only Allan Gray Equity Fund and Coronation Equity Fund would have been compliant with UCITS rules at the date of the last disclosed fact sheets.

Indeed, the fund holdings are so concentrated that even if you theoretically rolled up these 10 equity funds into a single fund, it still wouldn’t pass the UCITS diversification rules.

Not even a passive fund assists with diversification because the Satrix 40 would have breached the UCITS rules with 20.7% in Naspers at the 30th September 2017.

Every market has companies whose practices ultimately come to light in scandals surrounding irregularities or questionable business practices. Canada has had Valeant, the US has had Enron, the UK has had Provident Financial and Japan has had Toshiba. While South Africa has had more than its fair share in recent years, with Africa Bank (ABIL) and now Steinhoff, the stark difference is that the average domestic fund manager’s exposure in Canada, the US, the UK and Japan to each of those other examples of collapses would not have been anywhere close to the near 5% seen with Steinhoff.

All we need is to find a few good investment ideas a year and to avoid disasters.

No active fund manager in the world calls every investment correctly and any claims to the contrary should quickly conjure up memories of Madoff. This shouldn’t be surprising because when investing, you are making a call on the future and the future doesn’t always turn out as expected. Indeed the late Simon Marais, a wonderful man and great investor, used to tell me during my time at Orbis, “All we need is to find a few good investment ideas a year and to avoid disasters.”

Despite working to that mantra at Ranmore Fund Management over the past 9 years, we have still had our share of investment disappointments. But what is most important is that when your investment thesis doesn’t play out, you are firstly, sufficiently diversified and secondly, you have the liquidity to promptly correct it without too much of an impact on the Fund’s net asset value. And this is where the problem lies for SA domestic investors.

Using Bloomberg data, I calculate that there are only 43 companies in the Johannesburg All Share index where the average daily value of shares traded is greater than $10m. In contrast, 1554 constituents of the MSCI World Index trade more than $10m per day and this excludes Chinese and South Korean listed companies because they are not part of the MSCI World Index.

Given the importance of liquidity, if some Steinhoff type “Black Swan” event occurred with Naspers, British American Tobacco or Sasol, all of which are owned in size by the top funds, who are these funds going to sell to? Especially since the largest Balanced funds are managed by the same fund managers and therefore hold many of the same positions.

This problem may have occurred with Steinhoff where Allan Gray Equity was the only actively managed fund of the aforementioned equity funds not to own the company and so at the time of need, the other 9 funds were left with no buyers other than bottom feeders and short sellers buying back their borrowed positions.

Every investment carries risks – Tencent trades at over 50 times historic earnings and disclose that they earn revenue under “co-operation (and other) arrangements” with their Associates of which they consider the revenue from “co-operation agreements” insignificant. British American Tobacco faces regulatory and possibly product (and customer) obsolescence risk and the South African Government regulates the pump price of petrol, a key variable for Sasol.

Exchange control over the years has meant that unlike most residents in developed market economies, South African investors couldn’t diversify their assets internationally and while exchange control for individuals has in practice now largely been removed, trusts and institutions are still limited to investing a maximum of 25% offshore.

Looking at it from the other perspective, I submit no prudent global investors would invest 75% of their assets in a market which has an international weighting in the very low single digits and then to concentrate this risk even further by investing 20% in a single share.

So if the PIC is concerned about the losses suffered by pensioners as a result of Steinhoff, they should be pressuring the Government, the Industry and the Financial Services Board to allow institutions to diversify considerably more than 25% of their assets internationally where they are less exposed to the regional and portfolio concentration risks of investing in a single market.

As Christo Wiese has unfortunately learned, if your risk is concentrated and the future doesn’t play out as expected, it does not matter for how long you have been compounding returns.

The only way to avoid catastrophic financial loss is diversification and this is hard to do in a small, illiquid market where everyone seems to own the same shares. All investors would do well to learn from the mistakes of others and consider the extent of their “true” diversification on a global basis.


Sean Peche
Portfolio Manager
Ranmore Global Equity Fund Plc