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Forensic accounting analysis as key competitive advantage

Week in and out, the arduous search for funds to review for finweek’s Fund in Focus page, for which outperformance is part of the criteria, has attested to the challenge of generating alpha (the additional performance when compared to the general market or benchmarks). The pursuit of outperformance has been no different to that of searching for needles in haystacks.

For the past year-to-date, returns in minuses and red have been custom and this is across almost all asset classes save for the commodities and multi-asset managers who were spared the wrath of Covid-19.

In this article, we will look at the investment strategy and approaches employed by a handful of SA equity funds that have successfully manoeuvred the lingering market uncertainty and ensuing losses, how they went about picking unbeaten stocks and
where they are searching for their next alpha.

Steyn Capital Equity Prescient Fund performance 2021

Forensic accounting analysis as key competitive advantage

The investment strategy of Steyn Capital’s Equity Prescient Fund is premised on maximising investor capital by buying securities with trading values materially lower than their intrinsic values.

Steyn Capital applies developed market research techniques gleaned from experience garnered by US hedge funds (which manage billions of dollars) into a less efficient market like South Africa, to generate alpha over time, according to the fund manager and founder, André Steyn.

He says Steyn Capital has a team of forensic accounting analysts who pore over company financial statements to convert reported data into economic reality and populate a proprietary research screen, which they use as a starting point for their intensive research process.

Their research process follows a 15-step checklist approach focusing on valuation, quality of earnings, business quality, and management alignment with investors. He says the forensic accounting analysis is a key competitive advantage, and this approach helps to identify short-sale candidates which they short in their hedge fund and avoid in their long-only funds.

“We typically spend more than 200 hours researching a stock prior to initiating a position, and we seek to demonstrate a variant perception on each of our holdings. We ignore indices in our portfolio construction and build the portfolio solely by including our highest conviction ideas, while managing risk from the top down.”

Gaming stocks

While performance has been broad-based in several stocks over the past year, Steyn says their core positions in gaming stocks Tsogo Sun and Sun International added considerable alpha.

Steyn Capital Equity Prescient Fund performance 2021

“We had existing positions in these high-quality, local monopoly-type businesses ahead of Covid19, which initially hurt our performance during the first part of 2020. However, our research strongly suggested that these businesses had much lower financial risk than was generally perceived, partly due to the inability of banks to easily foreclose on licensed casinos, and would bounce back quickly once restrictions were relaxed.”

In addition to scrutinising cost reduction plans with management, Steyn says they performed case studies on international casino reopenings and combined reported company data with regulatory data and big data scrubbed daily from a variety of online sources to produce a model of daily revenue, which allowed them to have the conviction to materially increase their positions at the 2020 lows.

“In addition to buying aggressively on market, we co-underwrote the Sun International rights issue for R200m, earning an additional underwriting fee for our investors in the process.”


The team anticipates that many of the listed investment companies in SA, such as PSG, Ethos Capital and Reinet, will rerate from their current cyclically high discounts to intrinsic value.

Steyn says they have harvested certain of their SA Inc positions and reallocated to SA-listed companies with hard currency earnings such as Quilter and Pan African Resources, to take advantage of the somewhat stronger rand and diversify their risk.

This is an excerpt from the article “SA’s Top Equity Funds” by Timothy Rangongo, published on 8 October 2021 in FinWeek.