Thank you to Harry Markowitz, the father of the modern portfolio theory, which aims to limit risk and optimise returns by diversifying investments across all asset classes, their sub-classes and underlying securities. And thank you to those responsible for putting in place legislation and regulation that enforces investment diversification. Legislation (such as the Collective Investment Schemes Control Act) and regulations (such as Regulation 28 of the Pension Funds Act) limit the exposure to any single security.

Diversification, and the measures to enforce it, can yet again be credited for protecting many investors, both individual and institutional (particularly retirement funds) from the fall-out of Steinhoff International. If it were not for enforced diversification, the Steinhoff burnout may have been far worse for SA retirement fund members and pensioners.

Think back to Enron. Its collapse in 2001 was the biggest single corporate disaster in US history. The sudden, violent disintegration of Enron came virtually overnight, when it could no longer conceal the numerous dubious strategies it had devised to hide enormous losses.

In the wake of the collapse, thousands of employees and pensioners lost their retirement savings that their Enron-sponsored occupation retirement fund had invested in the company.

SA legislation and regulation does more than enforce modern portfolio theory – it also limits how much retirement money may be invested by an occupational retirement fund in a sponsoring company.

There are some exceptions, in SA, when it comes to protecting retirement fund money, namely the state- and utility-sponsored retirement funds, in particular the Government Employees Pension Fund (GEPF), which is among the largest pension funds in the world. The GEPF is subject to its own legislation and not to the much more protective Pension Funds Act.

This has resulted in some very dubious investments made in recent years by the Public Investment Corporation (which manages GEPF assets) and, earlier, by the Transnet retirement funds, to the disadvantage of contributing members and pensioners.

Quite how big the impact of Steinhoff will be on the GEPF will probably take years to assess as the Steinhoff spectacle plays itself out, but early indications are that the losses could be significant.

It’s hardly surprising that the Public Servants Association is now calling for the safeguarding of the pension savings of its members – the best safeguard would to be to include all funds within the net of retirement fund legislation.

Some of the parallels with Enron and Steinhoff are eerie. For example, the exposure of the corporate failures was sparked by the resignations of the CEO (both supposed financial superstars) – Enron’s Jeffrey Skilling and Steinhoff’s Markus Jooste.

While many individuals can be thankful to Markowitz and those who enforced his theory, there is again a list of those who cannot be thanked, those who have again failed investors. Chief among these are the accountants and auditors. They charge enormous fees to supposedly ensure that the interests of investors are protected. Yet all too often, they seem to be implicated in the very misdeeds that cause the failures.

In the case of Enron, international accounting company Arthur Andersen, which went as far as to destroy files, ceased to exist. But there are not only questions to be answered by the accountants and auditors paid by Steinhoff – there are questions to be asked of others. Those others include lawyers, tax consultants and banks that may have participated or even initiated questionable strategies and structures.

Also under the spotlight, yet again, are credit rating agencies and active (as opposed to passive) investment managers whose job it is to seek out the dubious and be alert to them. They appear to have failed spectacularly.

Moody’s downgraded Steinhoff to junk status after the resignation of Jooste. So the pre-collapse rating could be considered on an equal level of ‘junk’ – the same sort of junk dished out by rating agencies before the 2008 world economic meltdown, caused in part by rating agencies giving what proved to be phoney ratings to toxic sub-prime debt.

Then there are those investment managers who are excessively well-paid to actively manage the savings of individuals. Hardly one blew the whistle on Steinhoff. Instead, many ploughed in investor money – a repeat of African Bank but on a larger scale. We need a review of protection systems and tougher laws. If found guilty, some people need to go to jail.

By Bruce Cameron
Image: Wilnicque Rall