E-Noted Cautious Conservative Consistent - Ne-FG Financial Group
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e-Noted Cautious • Conservative • Consistent
MARKET SUMMARY 1
Index total returns as at 28 February 2018
Index Close YTD 1-month 6-month 1-year 3-year 5-year 7-year
FTSE/JSE All Share 58 325 -1.9% -4.1% 4.5% 17.5% 6.4% 11.3% 12.2%
FTSE/JSE Resources 20 307 -1.8% -7.5% 3.8% 16.1% -3.1% -2.6% -3.5%
FTSE/JSE Financials 47 196 -0.5% 1.4% 12.1% 20.6% 6.9% 14.2% 17.1%
FTSE/JSE Industrials 55 633 3.4% -1.9% 15.9% 20.5% 8.7% 9.7% 13.4%
FTSE/JSE SA Listed Prop 562 -18.8% -10.5% -10.5% -6.1% 0.5% 7.9% 13.3%
FTSE/JSE Mid-Caps 79 686 -0.2% -0.7% 6.1% 5.8% 5.7% 11.3% 13.6%
FTSE/JSE Small Caps 60 846 0.1% -1.2% 4.8% -1.2% 4.5% 11.7% 13.9%
MSCI World Index $ 2 118 1.0% -5.0% 9.9% 18.0% 8.8% 11.4% 9.5%
MSCI Emerging Market $ 1 195 3.3% -5.6% 11.1% 31.0% 9.5% 5.4% 4.0%
Currency appreciation as 28 February 2018
Currencies Close YTD 1-month 6-month 1-year 3-year 5-year 7-year
ZAR/USD R 11.80 4.7% 0.5% 9.3% 10.2% -0.4% -7.1% -15.5%
ZAR/GBP R 16.23 2.9% 3.4% 3.5% 0.1% 3.2% -4.0% -7.8%
ZAR/EUR R 14.38 3.2% 2.2% 7.1% -3.6% -3.5% -4.9% -9.3%
Fund returns as at 28 February 2018
Funds YTD 1-month 6-month 1-year 3-year 5-year 7-year
Stable Portfolio -0.05% -0.56% 2.35% 7.35% 6.92% 8.33% 9.25%
Multi Asset Low Equity -0.69% -0.63% 1.94% 6.61% 5.31% 7.34% 8.26%
Benchmark: CPI + 3% 1.25% 0.51% 3.25% 7.50% 8.88% 8.65% 8.73%
Moderate Portfolio -1.10% -1.42% 2.07% 8.12% 5.92% 9.19% 10.36%
Multi Asset Medium Equity -1.22% -1.22% 1.47% 6.96% 4.39% 7.76% 8.83%
Benchmark: CPI + 5% 1.57% 0.66% 4.23% 9.59% 10.99% 10.76% 10.84%
Aggressive Portfolio -1.76% -1.99% 2.86% 11.17% 4.60% 10.17% 11.57%
SA - Equity - General -1.05% -1.28% 3.63% 10.40% 3.12% 8.54% 9.65%
Benchmark: CPI + 7% 1.88% 0.81% 5.21% 11.67% 13.11% 12.87% 12.95%
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2
Commodity returns as at 28 February 2018
Commodity Close YTD 1-month 6-month 1-year 3-year 5-year 7-year
Oil Brent Crude Spot $ 64.73 -2.1% -5.6% 21.5% 14.5% -5.0% -6.6% -4.8%
Gold $ 1 318.31 1.2% -2.0% -0.2% 5.6% 2.8% -3.6% -1.0%
Platinum $ 983.58 6.0% -1.8% -1.6% -4.0% -6.1% -9.1% -8.3%
Silver $ 16.42 -3.1% -5.4% -6.6% -10.4% -0.4% -10.5% -9.8%
Aluminium $ 2 132.00 -6.0% -3.9% 0.7% 10.8% 5.5% 1.2% -2.8%
Copper $ 6 931.00 -4.4% -2.6% 2.1% 16.0% 5.5% -2.4% -4.9%
Corn $ 374.50 6.8% 3.6% 9.4% 2.1% -0.9% -12.2% -9.0%
Sugar $ 13.48 -11.1% 1.9% -6.4% -30.2% -1.1% -6.0% -11.8%
Iron Ore $ 75.59 6.8% 5.6% -3.8% -18.2% 5.6% -12.9% -8.0%
Economic indicators as at 28 February 2018
Repo Rate 6.75% South African 10-year Bond 8.12%
Prime Rate 10.25% US 10-year Treasury Bond 2.88%
PPI Inflation 5.10% US Fed Fund Rate 1.30%
CPI Inflation 4.40% Euro Area REFI 0.00%
ECONOMIC HIGHLIGHTS
Local
SA unemployment rate improved to 26.7% in the final quarter of 2017, but this was due to a decline in the size of the
labour force rather than an increase in employment.
SA retail sales declined a little more than expected in December after a spectacular boost in November as a result of Black
Friday. For 2017 as a whole, SA retail sales grew by a respectable 3.0%.
SA National Budget 2018/2019. Government made the tough decision to increase VAT and endeavor to restore fiscal
discipline. Now the focus has to shift to removing the constraints to growth.
SA consumer inflation fell further to 4.4% in January 2018, helped by a reduction in the petrol price. Core inflation down
at 4.1%. This is another argument supporting a cut in interest rates by Reserve Bank.
Global
Analysts raised their target yield for the US 10-year bond from 3% to 3.3-3.5% because of the stronger economy, although
the market is overdue for a consolidation period in the short-term.
US tax cuts and higher government spending will extend its economic expansion to 2020.
Analysts think the Fed under Powell will now raise interest rates 4 times in 2018, no longer 3 times.
US economic growth is strong, unemployment is low and inflation is close to the Fed’s objective. The economy will be
buoyed by tax cuts, higher government spending, more infrastructure spending and strong S&P earnings
Usually the US stock market rally ends when the Fed engineers a recession by raising interest rates due to accelerating
inflation. When the rates rise high enough to be higher than long-term rates, share prices decline.
0861 409 409 | www.n-e-fg.com | admin@n-e-fg.comAnton van Niekerk 3
Investment Analyst
B.Com Hons (Financial Risk Management)
Passed level III of the CFA Program in 2017
ANALYST COMMENTS
Steinhoff Share Price The graph depicts the share price
R100
movement of Steinhoff from
R80 2010/02/28 up to 2018/02/28. In
the writing below we explain the
R60
events as they unfolded, the
R40 views on Steinhoff prior to the
R20
collapse and the importance of
diversification.
R-
2010/02 2011/02 2012/02 2013/02 2014/02 2015/02 2016/02 2017/02 2018/02
Steinhoff is a global retail holding company that provides everyday products at affordable prices. The company is listed on the
JSE Stock Exchange as well as the Frankfurt Stock Exchange. Steinhoff’s reach stretches to over 30 countries with more than
12 000 stores and well-known brands such as Pep, Ackermans, Mattress Firm, Conforama, Poundland and Kika Leiner. The share
price of the company reached its peak of over R95 at the end of March 2016 and the size (market capitalization) of the listed
company stretched to over R390bn. As at the end of December 2017 the size of the company stood at around R19bn with a share
price at R4.65 down over 95% which meant that more than R370bn have been wiped away. Below we will explain the events that
unfolded, the views of the Asset Management Industry on the company and the importance of diversification.
Unfolding of events
The first notable event unfolded on 24 August 2017, when Steinhoff refuted allegations made in an article by the German Manager
Magazin on the JSE news service (SENS). The allegations included an ongoing legal dispute between Steinhoff and Andreas
Seifert over the ownership of certain of its European retail operations, a history of numerous acquisitions, and the allegation that
losses were being incurred in off-balance sheet entities.
Steinhoff released an announcement on 18 September 2017, relating to an update on disputes with their former joint venture
partner Andreas Seifert. Steinhoff reassured investors that the case would be dismissed by rejecting allegations made within the
announcement. The company informed shareholders that adequate provisions have been made relating to liabilities which may
result from these court cases and that its financial accounts had received an unqualified audit opinion from Deloitte.
On 8 November 2017 a second news article appeared with new allegations. The Reuters article indicated that the company held
an undisclosed interest in a company called GT Branding Holding which had previously purchased certain Steinhoff brands through
its subsidiaries. Steinhoff’s response was limited due to being in a closed period before the release of their financial results and
responded with an announcement in which Markus Jooste said: “All reporting requirements have been met. This has been
confirmed by our internal legal team and external experts.” The company also referenced its annual accounts from 30 September
2016.
Stakeholders expected the release of Steinhoff’s financial results on 4 December 2017 and were surprised by the company
announcing that the results scheduled for release would be unaudited. Two days later on 6 December 2017 Steinhoff announced
that the CEO, Markus Jooste, had resigned with immediate effect and that new information has come to light which relates to
accounting irregularities and required further investigation.
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The severity of the news was seen in the share price which dropped over 86% within two days after the CEO’s resignation. Markus
Jooste lead Steinhoff for 17 years as their CEO and his immediate resignation meant that there ought to be serious validity relating
to some the aforementioned allegations.
Views on Steinhoff prior to its collapse
Prior to the expected release of Steinhoff’s financial results and the resignation of their CEO the company presented itself as a
compelling investment opportunity. The below points highlight some of the reasons for this:
The share of the company traded at a 9-10x price to earnings (PE) multiple within a market with an average PE of over
20x. It was also expected that new acquisitions (Poundland and Mattress Firm) would contribute significantly to earnings
in the years to come.
Steinhoff had highly respected businesspeople within management and on the board such as Sean Summers (former
Pick n Pay CEO), Christo Wiese, Andy Bond (former CEO of Asda), Jannie Mouton, Louis van der Watt (cofounder of the
Atterbury Group), Jo Grove (former Unitrans CEO), Thierry Guibert (former CEO of Conforama), David Sussman (former JD
Group CEO), Eugene Beneke (former CEO of Iliad Africa CEO) and that is only to name a few.
Christo Wiese held 23% of the company and management held around 10%, which meant that they were heavily invested
leading to continued drive to grow the business.
In October 2017, we attended a presentation by Coronation which highlighted their investment case on Steinhoff. At the end of
October Investec released a research report on Steinhoff indicating a buy recommendation with a target price of R88 per share
which indicated upside of over 40%. On 20 November 2017, Anchor Capital released an Investment Thesis video on the
attractiveness of the company. These positives on Steinhoff weren’t easy to ignore and was reasonable taking into account that
Steinhoff refuted all allegations and continued to reassure investors that the news has been sensationalized. These are indications
that the resignation of the CEO and the investigation into accounting irregularities could not have been foreseen by the investment
community.
The importance of diversification
Steinhoff wiped away over R370bn of shareholder equity meaning that individuals, funds and institutions lost a significant sum
of money. The JSE Shareholder Weighted Index (JSE SWIX Index) which is the benchmark for the N-e-FG BCI Equity Fund held
around 2.3% in Steinhoff just before the above events unfolded. Exposure to Steinhoff was limited within the N-e-FG Funds as
we held: 1.72% in the N-e-FG BCI Equity Fund, 1.22% in the N-e-FG BCI Flexible Fund and 0% in the N-e-FG BCI Income Provider.
Our underweight position softened the effect of Steinhoff’s share price plummet.
It is important to note that analysts are presented with certain information regarding a company and if this information is
fraudulent or misstated by a company, especially if the information is signed off by trusted auditors, it would lead to
misperceptions regarding the valuation of that company. Using hindsight we regret holding Steinhoff shares in our portfolios,
however before the collapse our decision to hold Steinhoff shares was adequate as prudent research had been done.
We would like to remind clients that diversification is important to us and that we would never hold only a single stock within
any of our funds. At N-e-FG we make well informed decisions regarding the amount of capital we allocate to certain investment
opportunities thereby limiting the risk of capital loss over the long term.
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QUOTE OF THE MONTH
Benjamin Graham, from The Intelligent Investor
“Finally, don’t invest in only one stock–or even just a handful of different stocks.
Unless you are not willing to spread your bets, you shouldn’t bet at all.”
DISCLAIMER
Collective Investment Schemes (CIS) or Unit Trusts are generally medium to long-term investments. The value of participatory interests may go down as well as up and past
performance is not necessarily a guide to the future. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are
calculated on a net asset value basis, which is the total value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio.
Portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. Income is reinvested on the ex-dividend date. Total return performances
are published. The source is FactSet, Bloomberg and MoneyMate. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the
date reinvestment of income. A schedule of fees and charges and maximum commissions is available from the manager / scheme. Commission and incentives may be paid and if so,
would be included in the overall costs. Forward pricing is used. The following charges are levied against the portfolio: Brokerage, auditor’s fees, bank charges and trustee fees.
Commissions and incentives may be paid and if so, are included in the overall costs. A schedule of fees and charges and maximum commissions is available on request from N-e-FG
Fund Management. Forward pricing is used.
N-e-FG Fund Management is a member of the Association for Savings and investment South Africa (ASISA).
Please note: Past Performances is not a good indication to future performances.
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