Steinhoff’s Growth score in June 2017 suffered due to analysts consistently revising profit estimates downward, compounded by poor price performance and a decline in the company’s asset base. While the collapse in Growth may have been the tipping point, Steinhoff had already shown significant weaknesses in Quality, evidenced by a low return on equity and considerable disagreement among analysts regarding its prospects.

Detecting early warning signs

It’s worth exploring whether the EMS Fund’s investment style naturally steered it away from companies involved in corporate fraud and helped identify early warning signs of Steinhoff’s troubles. For instance, when analysts struggle to reach consensus on a company’s future, as was the case with Steinhoff, it may indicate that the company is too complex to understand—potentially by design. Additionally, if a company’s reported earnings significantly exceed its cash earnings, it could signal that headline earnings are being inflated through asset revaluations or other accounting manoeuvres, obscuring the true performance of the underlying business.

The Fund’s systematic approach may help it sidestep companies engaged in questionable practices. Indicators such as analyst disagreement or discrepancies between reported earnings and cash flow can reveal underlying risks. By rigorously applying its process, the EMS Fund aims to identify and mitigate potential pitfalls.

Repeatable processes without human biases

During the Covid-19 pandemic in early 2020, markets faced significant turmoil, with the South African market losing 25% in the first quarter. In such volatile conditions, human managers might be tempted to liquidate portfolios out of fear of further losses. However, the EMS Fund adhered to its investment process, resulting in a robust recovery. While it initially fell in line with its peers, the Fund rebounded impressively, outperforming competitors by 13.8 percentage points by year-end.

On the other hand, another often seen bias in active portfolio management, like ‘Regret Theory,’ can distort decision-making in a different way. Fund managers may shy away from bold positions due to fear of reputational damage if those investments perform poorly. This environment frequently leads to “hugging the index,” where managers avoid risks that could threaten their careers. In contrast, the systematic approach of the STANLIB Enhanced Multi Style Fund mitigates these psychological pressures, allowing for calculated risks without the emotional burden that often affects human managers.

The power of diversification

Modern risk management emphasises diversification across stocks and sectors, but the EMS Fund adopts a broader perspective, focusing on style diversification. By integrating multiple investment styles—rather than concentrating on a single approach like value or growth—the EMS Fund has achieved consistent outperformance across various market cycles.

This multi-style methodology incorporates diverse fundamental perspectives, creating a robust framework that produces portfolios characterised by lower costs, higher quality, and greater growth potential than the market.

The EMS Fund operates independently of market sentiment, concentrating on fundamental traits that historically indicate strong share price performance. While it may miss out on certain high-flying stocks, its consistent outperformance underscores the effectiveness of its strategy. Unlike traditional managers who might claim foresight regarding Steinhoff, the EMS Fund evaluated the stock as unattractive based on fundamental analysis.

This resilience stemmed from the Fund’s commitment to a consistent process. Even amid drastic share price declines, the EMS Fund’s focus on quality and growth allowed it to avoid drastic repositioning, ultimately benefiting its investors.