36ONE co-founder and director Cy Jacobs accurately predicted problems at Steinhoff and its subsidiary, JD Group, but paid the price for speaking out.
Jacobs is one of South Africa’s top investors and built 36ONE into a highly respected asset management firm with billions under management.
His ability to spot problems at companies and identify mispriced securities has produced exceptional results for 36ONE’s clients over the last eighteen years.
Jacobs was one of the first fund managers to sound the alarm about accounting problems at Steinhoff, and specifically JD Group. However, he was not rewarded for his work.
Speaking to Biznews, he said they shorted JD Group in 2009. They did not expect the retailer to go belly up, but its financial performance was deteriorating.
Just before JD Group was set to announce its results, Steinhoff bought a controlling stake in the company.
The results which followed were fantastic. Part of the improved finances included capitalising its IT costs and changing the provisioning for debtors.
Jacobs, who previously audited JD Group, knew something was wrong.
He met Markus Jooste for the first time at the JD Group results event and told him that the finances were not accurate.
However, he did not suspect Jooste to be responsible for the false results. In fact, he wanted to alert the Steinhoff CEO that someone was trying to pull the wool over his eyes.
Instead of getting credit for his insights, Jacobs’ relationship with Jooste and Steinhoff started to sour.
“I did not get invited to company functions. 36ONE was spoken about in a bad light with brokers on Jooste’s behalf,” he said.
Jooste used his influence to make life difficult for Jacobs and 36ONE and attack their credibility among the investment community.
He was not the only person to have suffered Jooste’s wrath for highlighting problems with JD Group’s numbers.
Independent from Jacobs’ work, an analyst at a major bank wrote a report about JD Group, highlighting that the numbers were fictitious.
“It was a brilliant report. It was one of the first reports I have seen calling a stock only about 20% of its share price,” he said.
However, the bank retracted the report the next day, and the analyst left the institution shortly afterwards.
“Obviously, Markus has caused that. The analyst was also never allowed to tell her story,” Jacobs said.
36ONE maintained its short position in Steinhoff but was eventually talked out of it by Evan Walker, a new investment team member at the time.
Walker said that although Steinhoff may have problems, Jooste had such strong support among big institutions that it would be a costly bet.
This story shows the risk for analysts and fund managers to go against the prevailing narrative and speak out about problems at listed companies.