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The advice above from experienced portfolio manager Simon Hudson-Peacock in the book The Effective Investor is something local investors should bear in mind as the appetite for small cap stocks returns and peddlers of “the next big, sexy thing” start coming out of the woodwork.
The Tannenbaum Ponzi scheme, Blue Financial Services, Edwafin, King Financial Holdings, Country Foods and most recently Sharemax all hit the news for the wrong reasons and investors were left scratching their heads and wondering what happened to their promises of infinite wealth.
However, what’s become apparent is that – irrespective of whether you’re the Ferrari-racing CEO of a listed company or a pensioner in an old-age home who can’t run away from a Sharemax broker because your wheelchair has been clamped – you’re vulnerable to being sold a good story.
Ironically, while there’s the allure of being involved in an unlisted investment inaccessible to most of the general public, the stock market and traditional listed investments have been great value for money over the past decade. The Stanlib and Investec listed property funds have returned 128% over the past five years, while the Satrix 40 has delivered 92%. If you wanted some excitement in the small cap sector you could have enjoyed 132% with the RMB Small/Mid Cap fund.
You don’t need to be sold “the next big, sexy thing” to make a solid return.
While unlisted property has been the source of many millionaires in South Africa, it’s also become the graveyard for a number of spectacular property syndication blow-outs. While Sharemax is on the lips of many investors, the fallout at King Financial Holdings (R680m) and Bluezone (R270m) highlight some of the risks attached to those asset classes.
With such good returns coming out of SA’s listed property offerings over the past decade, plus an after-tax dividend yield of between 7% and 8%, it seems difficult to understand why investors continue to be lulled into being trapped in property syndications.
Finweek approached Keillen Ndlovu, of the Stanlib Property franchise, on the benefits listed property offered. Top of the list for Ndlovu is the liquidity offered by listed property. “You can sell in and out of listed property stocks or unit trusts with 24-hour notice,” he says. On top of that, listed property has outperformed direct property since the launch of the IPD property index in 1996. Other important aspects include the research coverage and diversity offered by buying into traditional listed property offerings.
Over the next few pages we have prepared a list of “The Dirty Dozen” – some of the more spectacular “blow-outs” over the past few years that have burnt investors. What’s important for readers to consider is these so-called “blow-outs” have taken place in a number of different markets, including property syndication, JSE-listed shares and also unlisted debentures.
There’s no hard and fast rule for spotting hype over substance, with even “experts” being suckered in. However, there are some tell-tale signs that would-be investors should look out for before parting with their hard-earned cash.
According to the old saying, where there’s smoke, there’s fire. Experienced Finweek journalists, such as Vic de Klerk and Marc Hasenfuss, have warned investors against the likes of Edwafin, Sharemax, Garek, Wealth 4 U and SunAir – while Fin24.com was the first to raise the flag on King Financial Holdings – long before they imploded.
The sad thing is that by the time such blowhards become blowouts there’s not much more for the mass media to do than conduct lengthy post mortems.
In deconstructing both Sharemax and Edwafin, De Klerk zeroed in on the cash flow line and both came up sorely short. Others play a dangerous game of non-disclosure, which means shareholders can’t access audited financial documentation to confirm (or challenge) indicated valuations.
For those looking at unlisted share instruments, De Klerk raised another critical question when he was investigating Edwafin. That question is relevant for any unlisted share being pitched to investors and will tell a lot about the business model and the motivation for pitching you the investments. De Klerk asked: “Is the interest on the existing debentures – and your salary, for that matter – paid out of current operating income and profit or is it covered from the proceeds of the sale of new debentures?”
If the answer is the latter or you’re stone-walled when you ask the question, then you know there’s trouble brewing.
Finweek put it to leading Stanlib portfolio manager Shawn Stockigt that cash flow was probably the one true giveaway as to when a business was simply a house of cards waiting to topple. However, Stockigt took it back one step and said: “It’s a generalisation, but owners of businesses list their companies when they can unlock more personal wealth by listing than remaining independent. So with that as a starting point we look long and hard at a company that has no tangible track record and often would rather step aside than invest.”
On the issue of cash, Stockigt says: “We like a high cash conversion ratio – ie, operating profit relative to operating cash flow. And we’re very fond of a business that has the capacity to generate consistent free cash flows. Growth businesses or a business in its early life cycle will utilise cash to grow the business and hence might not generate cash growth in line with earnings growth. But unless they’re ploughing back the cash into areas that are giving them a better than the cost of capital return, it will over time have a negative impact on the business and could lead to ruin.”
Leading economist André Traverso gives a simple rule of thumb: “The amount of cash flow a company produces is a better indicator of its true value than earnings. When in doubt, follow the cash.”
After cash it comes down to a thorough review of a company’s management and with Google making information accessible to most retail investors there’s no excuse for not conducting a cursory background check.
While business gurus come in all shapes and sizes, there are some tell-tale signs for investors to consider. If you listen to the language of management, do they imply the debenture, property syndication or share is a better investment than the underlying businesses? Take Edwafin as an example: hard-selling brokers talked up the merits of the debenture but not the fortunes of the local car and paint manufacturing industries.
If prospects are as bright as they say they are, why is management a seller? How are their interests aligned to those of investors? Have they ever actually delivered genuine returns to shareholders?
We recently highlighted the case of Escalator Capital, where investors were shown a glitzy résumé of listed companies where its executives had been involved. Scratch the surface and you’ll find that track record littered with listed failures.
“Who is overseeing these investments?” is another question investors need to ask. When the Edwafin prospectus was doing the rounds it carried the logos of the South African Venture Capital Association (Savca) and the Financial Services Board (FSB). However, when investors turned to them for protection, they found those counted for very little.
If in doubt about the numbers or if the investment case sounds too good, remember Traverso’s advice: “Company managements lie. They lie through either commission or omission and either intentionally or through ignorance.”
FINANCIAL SERVICES BOARD
Delayed justice
One of the critical issues for investors is the lack of recourse when they’re burnt in risky investment schemes
The Edwafin issue highlights just how slowly the wheels of justice turn. In December 2008 investors stopped receiving their monthly dividends. In May 2009 a liquidation order was handed down against Edwafin and by September this year liquidators were still circling the carcass for anything to return to investors. However, many punters have given up.
Failed derivatives firm Dealstream continues to impact results at banking group Rand Merchant Bank since 2008 and those burnt in the Fidentia scheme are still awaiting their day in court.
While all the blame for failed investment schemes can’t be laid at its door, the annual report for the Financial Services Board (FSB) makes for some interesting reading. The FSB chairman wrote: “In the regulated industries, several financial services sector players claim to have improved their systems in the best interests of their clients. Whilst this is commendable, the increasing number of complaints to the various ombuds shows that there is still a long way to go.”
In his report-back, FSB executive officer Dube Tshidi added: “Whilst we successfully fulfilled our regulatory and supervisory role during this time, certain infrastructural issues were beyond our control and we battled somewhat with computer and tele-phone connectivity.”
Tshidi says at end-March 2010 the FSB employed 418 people, short of the 450 it had targeted. Put in context, that’s fewer people than the 620 asset managers Stanlib directly employs. Of those, there are effectively 105 people involved in the enforcement process, policing 13 875 key individuals.
For an organisation tasked with enforcing governance in the insurance, pension fund, capital and financial advisory markets that highlights the struggle regulators face. They’re short of numbers, can’t attract skills and in a world where money is shipped around at the click of a mouse button, one of the key regulatory agencies was sitting handicapped with no telephones.
After spending R26m on a new property, the FSB sits with R133m in its bank account but remains under-resourced. For the past financial year just R2,3m in fines and penalties were recovered. Considering 5,3m securities settlement instructions were issued in its past financial year, plus R4 trillion worth of assets held at the Central Securities Depository (CSD), that number would seem a tad low.
No bark, no bite, no surprise that unscrupulous operators feel confident enough to chance their arm against the regulators.
MARC ASHTON
The Tannenbaum Ponzi scheme, Blue Financial Services, Edwafin, King Financial Holdings, Country Foods and most recently Sharemax all hit the news for the wrong reasons and investors were left scratching their heads and wondering what happened to their promises of infinite wealth.
However, what’s become apparent is that – irrespective of whether you’re the Ferrari-racing CEO of a listed company or a pensioner in an old-age home who can’t run away from a Sharemax broker because your wheelchair has been clamped – you’re vulnerable to being sold a good story.
Ironically, while there’s the allure of being involved in an unlisted investment inaccessible to most of the general public, the stock market and traditional listed investments have been great value for money over the past decade. The Stanlib and Investec listed property funds have returned 128% over the past five years, while the Satrix 40 has delivered 92%. If you wanted some excitement in the small cap sector you could have enjoyed 132% with the RMB Small/Mid Cap fund.
You don’t need to be sold “the next big, sexy thing” to make a solid return.
While unlisted property has been the source of many millionaires in South Africa, it’s also become the graveyard for a number of spectacular property syndication blow-outs. While Sharemax is on the lips of many investors, the fallout at King Financial Holdings (R680m) and Bluezone (R270m) highlight some of the risks attached to those asset classes.
With such good returns coming out of SA’s listed property offerings over the past decade, plus an after-tax dividend yield of between 7% and 8%, it seems difficult to understand why investors continue to be lulled into being trapped in property syndications.
Finweek approached Keillen Ndlovu, of the Stanlib Property franchise, on the benefits listed property offered. Top of the list for Ndlovu is the liquidity offered by listed property. “You can sell in and out of listed property stocks or unit trusts with 24-hour notice,” he says. On top of that, listed property has outperformed direct property since the launch of the IPD property index in 1996. Other important aspects include the research coverage and diversity offered by buying into traditional listed property offerings.
Over the next few pages we have prepared a list of “The Dirty Dozen” – some of the more spectacular “blow-outs” over the past few years that have burnt investors. What’s important for readers to consider is these so-called “blow-outs” have taken place in a number of different markets, including property syndication, JSE-listed shares and also unlisted debentures.
There’s no hard and fast rule for spotting hype over substance, with even “experts” being suckered in. However, there are some tell-tale signs that would-be investors should look out for before parting with their hard-earned cash.
According to the old saying, where there’s smoke, there’s fire. Experienced Finweek journalists, such as Vic de Klerk and Marc Hasenfuss, have warned investors against the likes of Edwafin, Sharemax, Garek, Wealth 4 U and SunAir – while Fin24.com was the first to raise the flag on King Financial Holdings – long before they imploded.
The sad thing is that by the time such blowhards become blowouts there’s not much more for the mass media to do than conduct lengthy post mortems.
In deconstructing both Sharemax and Edwafin, De Klerk zeroed in on the cash flow line and both came up sorely short. Others play a dangerous game of non-disclosure, which means shareholders can’t access audited financial documentation to confirm (or challenge) indicated valuations.
For those looking at unlisted share instruments, De Klerk raised another critical question when he was investigating Edwafin. That question is relevant for any unlisted share being pitched to investors and will tell a lot about the business model and the motivation for pitching you the investments. De Klerk asked: “Is the interest on the existing debentures – and your salary, for that matter – paid out of current operating income and profit or is it covered from the proceeds of the sale of new debentures?”
If the answer is the latter or you’re stone-walled when you ask the question, then you know there’s trouble brewing.
Finweek put it to leading Stanlib portfolio manager Shawn Stockigt that cash flow was probably the one true giveaway as to when a business was simply a house of cards waiting to topple. However, Stockigt took it back one step and said: “It’s a generalisation, but owners of businesses list their companies when they can unlock more personal wealth by listing than remaining independent. So with that as a starting point we look long and hard at a company that has no tangible track record and often would rather step aside than invest.”
On the issue of cash, Stockigt says: “We like a high cash conversion ratio – ie, operating profit relative to operating cash flow. And we’re very fond of a business that has the capacity to generate consistent free cash flows. Growth businesses or a business in its early life cycle will utilise cash to grow the business and hence might not generate cash growth in line with earnings growth. But unless they’re ploughing back the cash into areas that are giving them a better than the cost of capital return, it will over time have a negative impact on the business and could lead to ruin.”
Leading economist André Traverso gives a simple rule of thumb: “The amount of cash flow a company produces is a better indicator of its true value than earnings. When in doubt, follow the cash.”
After cash it comes down to a thorough review of a company’s management and with Google making information accessible to most retail investors there’s no excuse for not conducting a cursory background check.
While business gurus come in all shapes and sizes, there are some tell-tale signs for investors to consider. If you listen to the language of management, do they imply the debenture, property syndication or share is a better investment than the underlying businesses? Take Edwafin as an example: hard-selling brokers talked up the merits of the debenture but not the fortunes of the local car and paint manufacturing industries.
If prospects are as bright as they say they are, why is management a seller? How are their interests aligned to those of investors? Have they ever actually delivered genuine returns to shareholders?
We recently highlighted the case of Escalator Capital, where investors were shown a glitzy résumé of listed companies where its executives had been involved. Scratch the surface and you’ll find that track record littered with listed failures.
“Who is overseeing these investments?” is another question investors need to ask. When the Edwafin prospectus was doing the rounds it carried the logos of the South African Venture Capital Association (Savca) and the Financial Services Board (FSB). However, when investors turned to them for protection, they found those counted for very little.
If in doubt about the numbers or if the investment case sounds too good, remember Traverso’s advice: “Company managements lie. They lie through either commission or omission and either intentionally or through ignorance.”
FINANCIAL SERVICES BOARD
Delayed justice
One of the critical issues for investors is the lack of recourse when they’re burnt in risky investment schemes
The Edwafin issue highlights just how slowly the wheels of justice turn. In December 2008 investors stopped receiving their monthly dividends. In May 2009 a liquidation order was handed down against Edwafin and by September this year liquidators were still circling the carcass for anything to return to investors. However, many punters have given up.
Failed derivatives firm Dealstream continues to impact results at banking group Rand Merchant Bank since 2008 and those burnt in the Fidentia scheme are still awaiting their day in court.
While all the blame for failed investment schemes can’t be laid at its door, the annual report for the Financial Services Board (FSB) makes for some interesting reading. The FSB chairman wrote: “In the regulated industries, several financial services sector players claim to have improved their systems in the best interests of their clients. Whilst this is commendable, the increasing number of complaints to the various ombuds shows that there is still a long way to go.”
In his report-back, FSB executive officer Dube Tshidi added: “Whilst we successfully fulfilled our regulatory and supervisory role during this time, certain infrastructural issues were beyond our control and we battled somewhat with computer and tele-phone connectivity.”
Tshidi says at end-March 2010 the FSB employed 418 people, short of the 450 it had targeted. Put in context, that’s fewer people than the 620 asset managers Stanlib directly employs. Of those, there are effectively 105 people involved in the enforcement process, policing 13 875 key individuals.
For an organisation tasked with enforcing governance in the insurance, pension fund, capital and financial advisory markets that highlights the struggle regulators face. They’re short of numbers, can’t attract skills and in a world where money is shipped around at the click of a mouse button, one of the key regulatory agencies was sitting handicapped with no telephones.
After spending R26m on a new property, the FSB sits with R133m in its bank account but remains under-resourced. For the past financial year just R2,3m in fines and penalties were recovered. Considering 5,3m securities settlement instructions were issued in its past financial year, plus R4 trillion worth of assets held at the Central Securities Depository (CSD), that number would seem a tad low.
No bark, no bite, no surprise that unscrupulous operators feel confident enough to chance their arm against the regulators.
MARC ASHTON
