Looking for answers from the unit trust team that lost 66% in two days

Hard questions being asked of Third Circle.

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.”



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what have I been saying – don’t trust any manager with YOUR money – all they care about are their fees – which they will grab come what may. invest directly – esp overseas – using brokers/manager just lengthens the gravy train of people taking money from YOU! the sad part is that there are REAL people at the end of this food chain!

Exactly just invest yourself
You can have a look at EasyStockPicker.co.za for local share ideas or just buy the world dbx tracker in your TFSA if you want global.

I bet you these turkeys have paid themselves, 66% or not. I actually agree with Robert..

Highly qualified, post graduate degrees etc etc ? ? ?
They do not know what they are doing!
The proof is in the abysmal results!

“only saying that the team was “highly qualified and multi-skilled” with “many years”
Can multi-skill also mean tying my shoelaces and boiling an egg?

I see no mention made that the same cowboys also lost 21% in the flexible fund and 14% in the DEFENSIVE FOF. I wonder what the total loss to investors would be in all 3 funds.

Further the TARGET return fund has lost 44% since inception in 2012.

WHO CAN AFFORD TO INVEST with this asset manager???

Blah, blah, blah …. corporate speak … blah … we lost your money …. blah .. greedy risk … blah, blah … we fell asleep …

Yet another failure of our so-called regulator and industry watchdogs. Allowing a high risk fund to charge performance fees on a low risk (low return) benchmark is basically giving the fund managers an option to print money. 5.5% expense ratio translates into a roughly R20m fee (on a R400m fund size) in one year. The high water mark (which if used correctly does protect investors from paying too much) is probably reset annually too…

Derivatives are not to be messed around with, because within a blink of an eye, anyone, and I mean anyone, can get their fingers burnt, regardless of experience, qualifications etc..

Patrick, I don’t know what answer you’re expecting to get out these guys, but I think it’s safe to assume that stupidity, carelessness and sheer wrecklessness with other people’s money had a lot to do with this mess.

Oh, and don’t get me started on the TER and benchmark fiasco, that on it’s own should’ve been a red flag to investors.

Don’t be so harsh people. They probably just implemented their ‘hedge’ the wrong way around. An honest mistake that anyone can make….

Hi Patrick, what about an article on Wealthfront Inc for example on how one can possibly avoid this type of fund risk, pay low fees and beat the benchmark?

‘’The proof of the pudding is in the eating’’. The biggest losses and ‘’fall outs’’ that I saw in my life were all by ‘’educated idiots’’. I worked with a lot of ‘’rocket scientists’’ that had a lot of the ‘’other’ ’experience in different principles, which did not include financial. They all had very advanced degrees and were normally employed in senior positions and they found themselves punching above their weight.
They were mostly quantitative modellers who developed computer based financial trading strategies, which included algorithmic trading, based on statistical analysis of historical data.
I met a lot a Corporate treasures with fancy qualifications (CA’s, MBA’s etc.) in my Treasury Corporate dealing days. In my view, that all had one thing in common….they did not have a cooking clue about the mechanics of ‘’financial markets’’, and especially derivatives, mostly because they did not enter for this subject at varsity and/or they never had any practical experience of the mechanics of these markets. At the end of the day they were the decision makers and didn’t know what risks they were running on very big books etc.
In my view these types of quant traders mostly fall into the same trap in rising and falling markets. Their models are telling them to buy the same stocks etc. when the market rises. Unfortunately, their models also tells them to start selling the same stock, at the same time. When this happens (as in the Nene-gate case), they were pushing the market against themselves and the liquidity in those shares (in this case the big financial institution names) disappeared and the bids and the market tumbled.
It is clear to me that Third Circle Management bought an ‘’naked option’’ which in my view is extremely dangerous and irresponsible, and when the market turned they had no protection and were forced to look for bids in the open market.
I will always believe that the rand will weaken on a trend due to the fact that funny things happen in our emerging market and certain politicians have verbal diarrhoea (like PW etc.) and when and if the market turns and you are sitting with a naked derivative without downside protection, you will lose 66 % in a very short time!
This brings me to my pet hate: FSB Regulatory Examinations. In did the FE and it did not teach me one single word about ‘’protecting consumers and professionalise the financial industry”, in terms of the objective of the FAIS act. It did teach me a lot of ‘’other things’’ but I don’t believe that these exams will protect them against any cowboys in the market. My view is that all types of markets should be regulated, and benchmarks set.
Today’s markets financial markets are dynamic and fast changing and these conditions demand highly qualified people with wide-ranging skills and knowledge. Globally acknowledged education programmes for the different principles should be instituted that provides portable, professional qualifications that will improve job performance, protect the customers, and set benchmarks in the industry.
Regulatory examinations should only then be undertaken which will ensure a close working relationship pertaining to the education and training of the market participants

“Ian Lane had no work experience at all before he joined Third Circle as chief investment officer (CIO) in June 2008” – This laaitie finished school around the turn of the century. Seems like he spent a few year with his nose in the books after that. Your assessment is therefore probably correct.

In an industry where experience matters as much as in this one, perhaps he should have looked for a mentor or two before taking on this little exercise.

The one question which springs to mind is which advisory force are placing monies with this relatively unknown investment house, when i can rattle off 9-10 names which will enable me to sleep easier at night as an investor.What incentives are being to these advisors?.A look at the website already left one feeling distinctly uncomfortable.Std Bank also needs to take some ownership here and get their hands dirty as opposed to just also collecting their portion for services rendered

Probably were writing deep out the money call options, earning a nice premium, and when Nene-Gate took place, those deep out the money call options were suddenly “in the money”, for the buyer.

Charles, I think you mean put options and not call options.

Who would invest in an unknown quantity? Sheeple?

There are a few boutique asset managers out there such as Baobab and Dolberg Spencer who seem to do quite well and then there is Third Circle a totally unknown fund. Would love to know the profile of their investors.

​What competitive edge does Third Circle Asset Management​ offer the investor?

Third Circle Asset Management utilizes Money Anchor Profile to ascertain the needs of the investor. Whilst the Money Anchor Profile assists the financial advisor to ascertain the investor’s capacity and appetite for risk, it is still the duty of the financial advisor to provide the investor with professional and objective advice. The Money Anchor Profile offers a definite competitive edge to the financial advisor and his client.​

Please note that there is no right or wrong personality type, this is merely an indication of the preferences of the investor. ​It remains the duty of the advisor to guide the investor to the optimum investment. The portfolios also take into account the different asset classes preferred by investors. The portfolio composition is made possible by the utilization of a Stochastic Portfolio Optimisation Through Simulation model (SPOTS). Straight out of their website, so now you know, SPOTS, a mangy cur of a trading system, is responsible.

I don’t know hey, sounds a bit sketchy to me. Long on excuses and short on details. Who is running this thing, Bernie Madoff? Sounds to me like a Ponzi scheme and they found the perfect time to pop the lid. Declare the losses and blame it on the Nene fiasco. Where in the world do you get a snot nosed youngster with who knows what experience to run an investment fund as the CIO? There is obviously more to come of this story. If it is not a fraud or a Ponzi scheme this is at the very least gross negligence.

End of comments.





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