An analysis by Moneyweb has found that more than R2.5 billion of African Bank Limited (Abil) debt instruments is still held in sidepocket unit trust funds. This is more than half of the money originally retained in these funds when Abil went into curatorship in August 2014.
An exact figure is difficult to find as managers report on these funds in different ways, and not all of them provide up to date information.
The figure is nevertheless significant, as Abil debt became tradeable again after the curator issued new instruments in April last year. These were linked to the new ‘good bank’ that was launched at the time.
More than a year later, however, managers are still struggling to wind up these funds.
Poor liquidity
Information from the Financial Services Board (FSB) shows that, at the end of April 2017, 39 of the original 47 sidepocket funds were still open. Some of these had managed to reduce their holdings, but many had not.
The frustration for investors is that they are unable to access any money that was transferred into these sidepocket funds. No withdrawals can be made, and the fund managers are reluctant to sell the instruments as liquidity is low.
“We could dispose of them at a massive discount and give that portion back to clients, but its not what we want to do,” explains Anthony Katakuzinos, COO for retail at Stanlib. “They are however paying out interest, so people are earning a return, and we believe we can get that capital back over time.”
Taquanta’s Ray Wallace, who manages the Nedgroup Investments Core Income Abil Retention Fund, agrees.
“Demand for the new African Bank bonds is still very low,” he says. “Although a few trades have taken place on the JSE and off-market, there is still not enough trading volume in the listed or unlisted debt to allow for proper market price discovery. It would therefore be unfair to unit holders to sell all the African Bank debt at untested and deeply discounted prices.”
Competing investor interests
What asset managers are having to do is weigh up the prejudice investors are facing by not being able to access their money, against the prejudice of not getting fair value for their investments and taking a loss. In most cases managers have decided that the latter is more important.
The head of the department of collective investment schemes at the Financial Services Board (FSB), Kedibone Dikokwe, says that the regulator is satisfied that managers are “acting with due care and in the interests of the investors” in this regard. She points out that obtaining optimal value for these investments is at the manager’s discretion and ensuring they do so is an important consideration.
Some funds have decided to close their sidepocket funds and trasnfer the Abil debt instruments back into the original fund. This has allowed investors to access that money, but it is also not a totally unproblematic approach.
“We haven’t done this because we are not prepared to just put the instruments back into the original portfolios unless we are 100% happy with the new bank and that it is suitable for all investors in that portfolio,” Katakuzinos says. “The reason we ring-fenced them in the first place was because of the uncertainty and so that we could manage them in the best interests of the investors we were affected at the time. We are not just going to collapse these back until we have a good feel for the new bank and its sustainability.”
A further complication is that some fund mandates simply might not allow the Abil debt to be reincorporated.
“African Bank is currently rated below the credit rating guidelines for investments into the Nedgroup Investments Core Income Fund, so re-integrating the retention fund into the main fund would be in breach of these guidelines,” explains Wallace.
In general, the instruments that fund managers have been able to sell are shorter dated – in other words they are maturing soon. It is much more difficult to find buyers for those with later maturity dates, as there is a higher risk attached to them.
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