CAPE TOWN – Last month Moneyweb reported how Third Circle Asset Management lost investors in one of its funds 66% in just two days late last year. The losses took place on Friday 11 and Monday 14 December, the weekend after Nhanhla Nene was removed as Finance Minister.
The fund managers have told Moneyweb that the portfolio held an extensive number of options that it was unable to unwind in its favour in the market turmoil that followed the announcement of Nene’s sacking, and that is what led to these extreme draw downs.
The management company, Metropolitan Collective Investments (MetCI), is however yet to disclose exactly what took place in the fund over those two days. A request by Moneyweb to see the trades made and positions entered into on December 11 and 14 was declined by MetCI Mickey Gambale, as “the portfolio strategy and trade positions are proprietary information”.
The Third Circle team
The losses were so extreme that questions have naturally been raised about the team responsible. Enquiries by Moneyweb have revealed that, before this episode, few people in the industry had heard of either Third Circle or any of the people behind it.
This has focused attention on the team’s asset management experience. According to his LinkedIn profile, Ian Lane had no work experience at all before he joined Third Circle as chief investment officer (CIO) in June 2008.
This is highly unusual in an industry where experience is a fund manager’s most valued quality. Established asset management firms generally do not let anyone make investment decisions until they have many years behind them.
Moneyweb asked Third Circle’s managing director, Hugo Snyman, to detail what asset management experience he and his investment team have and in particular what qualified Lane to be appointed as CIO. He however failed to provide any specifics, only saying that the team was “highly qualified and multi-skilled” with “many years of both both individual and cumulative experience”.
Snyman did not respond to a further request for details on exactly what that experience entailed.
What was the fund trying to achieve?
One of the most puzzling aspects of the Third Circle MET Target Return Fund is that its supplemental deed makes it clear that it is an equity-focused fund that will use a derivative strategy. However, its benchmark is the STeFI 3 month NCD Index + 1%, or in other words, cash + 1%.
In two separate emails Moneyweb asked Lane to explain why this benchmark was chosen and to explain how it was appropriate given the fund’s strategy. On both occasions, he failed to provide an answer.
The question is relevant for two reasons. The first is that the Third Circle MET Target Return Fund has earned its managers some very healthy performance fees for beating their benchmark. The fund’s minimum disclosure document (MDD) at the end of July, showed the fund charging a total expense ratio (TER) of 5.5%. As the annual management fee was listed as 1.88%, one can assume that the largest part of the remainder was the performance fee.
It is true, as Lane pointed out, that at that point the fund was one of the top performing unit trusts in the country over a one-year period. However, any performance fee still needs to be charged off a suitable benchmark.
Lane did concede that: “The risk profile of the fund has regrettably proven to be more volatile than expected, despite targeting uncorrelated, asymmetrically skewed returns in the structures employed, and as such the benchmark has at times possibly been exceeded by too great a margin, a consideration that we are bearing in mind whilst going through the process of determining the way forward from here. The fund has additionally always employed the high watermark principle to the benefit of investors.”
What about the fund’s strategy?
The second reason that the benchmark is important is that if the fund is, as it claims to be, a target return fund, then there would appear to be much more consistent and less risky ways to achieve a return of cash + 1%. As Moneyweb revealed last week, the Third Circle MET Target Return Fund was nearly three times more volatile than any fund in its category, even before the December losses.
Moneyweb asked Lane to explain why, if it had such a moderate target, the fund didn’t just use a traditional multi-asset approach.
His reply was that: “One of the motivations behind the fund is to have a low correlation to traditional investment strategies, and this includes not having a large exposure to the credit/default risk inherent in most shorter-duration, fixed-income type strategies. As such, structured financial instrument positions offer an alternative mechanism whereby returns with a lowered correlation to both fixed income and equity markets can be generated.”
To this, Moneyweb pointed out that it would be inconceivable for a unit trust compliant with legislation to lose 66% in two days through a credit default. In trying to avoid one risk, hadn’t Third Circle therefore just exposed investors to an even bigger one?
“With the benefit of hindsight, certain aspects have emerged around the fund that are under re-evaluation,” Lane replied. “At the time of fund design and launch we deemed the various elements as appropriate and they were approved as such, with the intention being to create an uncorrelated and differentiated investment option for investors who need to operate in the unit trust space.”
Given the massive failure in the fund, Moneyweb also wanted to know of Snyman what steps he had taken as MD with regards to the investment team.
“We have always and continuously striven to improve our methodologies and processes in order to better serve investors,” he replied. “I have no doubt that we, as a team and organisation, are well-equipped and possess the proven ability to resolutely restore the damage from the exceptional recent events over time.”