Third Circle’s losses put the spotlight on white labelling

The industry needs some honest introspection.

CAPE TOWN – In the ongoing debate around the Third Circle MET Target Return Fund that lost 66% in just two days last December, one of the issues that has been focussed on is the white labelling of unit trusts. This is the practice of a management company (manco), such as Metropolitan Collective Investments (MetCI), allowing smaller managers to run funds on its licence.

In a white label agreement, the manco effectively outsources the actual portfolio management to a third party. It however remains ultimately responsible for the fund.

The practice of white labelling is still relatively new in South Africa, and only a handful of management companies do it. For some, like Prescient or Sanlam, it is a small part of their business, but for others such at MetCI it is the bulk of what they do.

The primary purpose of white labelling is to give smaller managers a means to compete in an industry that has relatively high barriers to entry. Registering and running a manco is both time consuming and extremely expensive. Being able to use another company’s licence therefore gives these managers the chance to focus on portfolio management, and leave all of the back office requirements to the manco.

There is also no question that some boutique managers have taken advantage of this to run some incredibly successful funds. The likes of 36ONE, Autus, 27Four, Mazi and Anchor are all very highly regarded and extremely successful.

However, there is also little question that the majority of white-labelled funds are, at best, ordinary. There has been an explosion of small funds in the country, many of them funds of funds, that offer no real value proposition.

This is the first issue that most industry insiders highlight when discussing this question. It has been relatively easy to get a category II discretionary fund manager’s licence and start up a white-labelled fund of funds.

A lot of financial advisory firms, and even individuals, have done this. Undoubtedly a few of them have developed strong processes and well-run funds, but most add questionable value.

This has been a major criticism of white labelling – that it allows advisers to charge an asset management fee on top of their advice fee when they put clients into their own funds. The only benefit to the client in this arrangement is that within a unit trust structure the adviser can move in and out of funds without the investors paying capital gains tax, but it’s doubtful whether that justifies the ultimate cost.

The second big criticism of white labelling is that for some mancos it has now become a business model. In other words, they have very few or no funds of their own, and concentrate primarily on signing up other managers.

Many people in the industry see this is a highly problematic conflict of interest. If your business model is white labelling, you are incentivised to white label as many funds as possible, as that is how you grow the value of your business.

The first issue here is that if your focus is to sign up more and more funds, your standards may well be compromised. The counter argument from these mancos is that if their business is white labelling they will be more careful about who they sign up because they have both their business and their already-wide client base to protect. However, the fact remains that there is not an endless source of good asset managers out there looking to set up their own funds.

The second issue makes the first even more problematic. Because the more funds that a manco has, the more challenging it is to run proper risk management, portfolio surveillance, and compliance monitoring across all of them.

It is unlikely that a manco can, in real time, monitor trades and asset allocation decisions made at dozens of remote locations. The fact is that in big asset managers, the distance between the head of compliance, the dealing desk and the portfolio management is probably never more than one floor. But in a manco running scores of white labelled funds, it could be the distance from one end of the country to the other.

This is a serious, and critical challenge. It is also brought into focus by the losses sustained in the Third Circle fund.

Did MetCI have sophisticated enough systems in place to monitor what was happening in this fund, particularly in terms of the risks its was taking? Were its processes robust enough? And could it engage quickly and effectively enough with the portfolio manager?

Those are questions that still need to be independently answered and what is discovered may have important repercussions for white labelling in South Africa.

There is no doubt that giving smaller asset managers a way to compete against the established players in the unit trust industry is important. The market would be much poorer off without some of the brilliant boutiques that have used white labelling to launch their own funds.

But asset management is not just a business, it’s a responsibility. When other people’s life savings are involved, there is a duty to be prudent.

That is why more introspection is needed by both the industry and the regulator on the question of whether the barriers to entry haven’t now been lowered too far. There have to be standards in this industry, and it’s questionable whether those are currently set high enough.

And if white labelling is to be allowed, the mancos doing it have to be placed under even tighter scrutiny. Their systems actually have to be better – much better – than those run by the asset managers with their own mancos. Anything else is putting investors at risk, and that should be unacceptable.



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Dear Patrick
Although I respect your independence rate your articles in general highly, the above is very unfortunate as you tarnish a whole industry because of the actions of 1 player. It is like saying all whites are racists because of the actions of 1 person. Yes TC is a cobranded fund manager and they cannot be excused, but if you look at the ranking tables till 29/2/16, then you will note that they are the only cobranded fund amongst the 10 worst performing funds in the industry over 1 , 2 and 3 years, whilst over 4 and 5 year periods there are none. On the opposite of the coin, many cobranding funds are performing very well, so much so that over the recent years cobranded funds took the honours at the annual Raging Bull awards by winning most of the important multi asset categories and last year even the equity and fixed interest categories. This year alone cobranded funds were the winner of the Multi Asset Low Equity, High Equity and Flexible categories as well as General Equity and Interest Bearing Short Term categories. Last year it was similar. I cannot speak for other cobranding solution providers, but I can assure you that at BCI we have 85 partners and we monitor all our partner portfolios on a daily basis. We are proud to be associated with our cobranded partners. We firmly believe that our partner funds add the same if not more value to our investors than any other unit trust manager. We have one goal and that is to add value to our investors by providing them with financially sound unit trust products that create and preserve wealth. Instead of respondng line by line on the above, I would rather prefer that you visit us for a comprehensive due diligence and then write a follow up article. Any other concerned reader is also most welcome to contact me directly. My contact details are available on or on Linkedin.
Robert Walton, Boutique Collective Investments

This is the same Robert Walton, previously of MetCI, responsible for the Dynamic Wealth fiasco, who also then transferred the unit trust funds to Belvedere’s Kellermann’s Clarus funds ? Bit like the Pot calling the Kettle black, isn’t it ?

What is the point of Dynamic funds being moved to the high performing Kellerman Clarus fund? Nobody lost any money as the Clarus fund went on as per any other fund. Later on the Clarus fund just got moved to Contego – again no loss of money due to Kellerman as all the assets are owned by the trust company as per Collective Investment Schemes Control Act rules and not by the fund itself.

Robert, the article highlights the clear dangers of category 2 licences being awarded far too easily. It also suggests that too many white-labelled funds under one manco is a risk, which it clearly is when you look at MET – besides no explanation from them about Third Circle, they’re yet to give an acceptable explanation about Kellermann/Belvedere funds under their administration.

The fact that certain white-labelled funds have performed very well isn’t that relevant here, it’s to be expected, especially considering recent market conditions. It’s what happens to the innocent investor when administrators don’t perform their tasks responsibly, or discretionary licences are abused. That’s why regulators need to have a rethink. I know of a few very dodgy businesses who’ve applied for discretionary licences. Despite warnings to the regulator, I’m sure they’ll eventually be granted. Sadly!

What Patrick is also pointing out is the absolutely critical role that administrators play in protecting the investor. Belvedere administered a ton of different funds in various jurisdictions and whenever there’s any fraud within a fund all eyes rightfully turn to the administrator.

I’m a fiercely independent investment adviser and my experiences in this industry make me a very strong opponent of any category 1 (advisory) licence holder being allowed to also hold a category 2 (discretionary) licence. It’s a very obvious potential conflict of interest and not fair on the investor, who are really the only party of significance. I’m pleased that Patrick has highlighted these problems because something has to change.

A final note – I was very relieved when the only MET-administered fund I use for clients moved to BCIS.

@Green Jacket – As much as I agree on some points with respect to some dodgy white label funds this does not mean ALL white label funds are managed in the same way.
As is usual advisers don’t want to invest in a fund with a shorter than 5 years track record. I am so glad I have been using these funds and have been investing in 36-one, Visio, BlueAlpha for a long time. It’s up to the adviser to have seen the huge swings up and down on this fund and to avoid. Those direct investors could also do their own homework but I do believe METCI should take the blame for not acting when they should have. If you go it directly check the track record of the fund manager. Why should one knock guys like Cy Jacobs, Uys Meyer, Patrice Moyal, Stephen Brown that are under METCI/BCIS? They happen to be some of the best managers in ZA.
Luckily the concentration of white label funds under METCI is dropping as more of them move over to BCIS.

As I mentioned, you’d expect some of the white-labelled funds to do well and there are certainly some excellent fund managers using METCI, as you say. But I never implied that all white-labelled funds are managed poorly, just that some obviously aren’t and that’s where the problem, and focus of Patrick’s article, lies. If the administrator isn’t monitoring every fund very closely then investors are exposed to extra risks, as happened with Third Circle. It’s inexcusable what happened. I don’t know how any decent adviser who’d done their due diligence would’ve recommended that fund to any investor.

Regarding your comments about Belvedere/Kellermann up the page, R20bn in fraud identified by regulators and investigators overseas already, with plenty more to come. Give it some time, the picture should become much clearer.

My view again: Well done Patrick, once again a very good and informative article.
I don’t agree with Robert Dalton at all when he claims that ‘’you tarnish the whole industry’’, because of the actions of one person. Patrick is not playing the man here (industry), he is merely highlighting the characteristics and dangers of the funds in the hands of these so-called ‘’white label arrangements’’.
On more than one occasion I asked various questions on this forum pertaining to the way that these traders lost so much money, while claiming that that were ‘’hedged’. Answers provided by MetCi and Standard Bank on the ‘’naked derivatives’’ used to ‘’hedge’’ their exposures, after they lost ‘’a bar’’ in a very short time was not convincing and actually alarming pertaining to the risk/reward ratios of these investments.
I traded FX and money market instruments for more than 40 years (local and offshore) and with trial and error I learned at least one thing about the market, ‘’anything can happen in the financial markets and it usually does’’, as a result of political statements, a plethora of market information that moves the market every single day, etc. etc.
White-label funds are collective investment schemes set up under the licence of a collective investment schemes management company, but the underlying asset management decisions are taken by the third party, which in my view is irregular if not directly regulated.
These so-called third parties in my mind are no more than small ‘’mom and pop shops’’, mostly without a Manco and with questionable business models. They have very few or no funds of their own, and concentrate primarily on signing up other managers. I fail to understand why the FSB allows these type of investment schemes to operate without being regulated directly by at least a compliance officer on site.
Nobody (not even Enron) is too big or small to fail and every single investment scheme (directly or indirectly) should be regulated directly, in terms of the FAIS act.
I have also learned over the years that any directional movement in the markets also works in the extreme. The investments schemes quoted on this forum again proved that principle to me as they won some of the rewards by being involved with the ‘’winning and losing’’ tags. Hence the question should be asked here….can this unregulated situation be allowed to continue as it became clear to me that the traders at Third Circle MET Target Return Fund that lost 66% in just two days last December, traded like cowboys and/or don’t have a cooking clue about the instruments that they are trading in.

I wonder if it will ever be in the open what positions the fund had to loose so much. That way it would be easy to try and get to minus 66%. There had to be a lot of open long contracts on banks if with the short on the Alsi40 to still drop this %.
You cannot use “winning and losing” tags to knock all the white label funds as you cannot get the performance of some of these funds by pure luck over a 3 year period. Research the actual fund managers and you will find their skills over time.

End of comments.





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