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Local unit trust loses 66% in two days

Industry shocked by the extent of the losses.

 CAPE TOWN – In what appears to be an unprecedented episode in the South African unit trust industry, investors in the Third Circle MET Target Return Fund lost 66% of their investment in just two days last month. The fund’s net asset value fell from 98 cents per unit at the close of trade on Thursday 10 December to 33 cents per unit by the close on Monday 14 December.

In total, investors lost more than R250 million in this two-day period. Third Circle also runs two other unit trusts, both of which are heavily exposed to its Target Return Fund and so suffered knock-on effects. The total capital loss between the three funds is estimated to be just short of R435 million:

Source: Morningstar & fund fact sheet

Moneyweb has established that the losses in the Target Return Fund were caused by the fund managers taking extensive derivative positions that they were unable to unwind in their favour when the market moved. The fund held options in shares such as FirstRand, Barclays Africa, Nedbank, Sanlam, Remgro and Woolworths, which were all impacted by the market sell-off.

A number of people within the industry have expressed their disbelief at the severity of the capital losses. Questions have also been raised about the risk governance employed by Third Circle as the asset manager, the administrator Metropolitan Collective Investments, and the trustee Standard Bank.

The events in December

These huge losses took place in the bout of market volatility that was triggered by the removal of Nhlanhla Nene from the Finance Ministry on December 9. The fund’s performance was however way out of step with the overall market.

The value of the Third Circle MET Target Return Fund fell 35.14% on the Friday and a further 47.46% on the Monday. By contrast, the JSE All Share Index was down just under 2% on the first day, and flat on the second.

Third Circle’s head portfolio manager Ian Lane, told Moneyweb that this fund uses options to gain exposure to local equity as the managers believed it provided downside protection, even though it meant that they didn’t get the full upside.

However, in the sharp market weakness following Nene’s dismissal, these positions became massively problematic. The hedge that Third Circle believed it had in place through options on the Top 40 also did not provide the protection they anticipated it would.

The fund managers were thus forced to “rapidly neutralise positions on the morning of December 11, in order to both maintain compliance with the Collective Investment Schemes Control Act (CISCA) and to avoid deepening capital losses in the best interests of our investors,” Lane explained. “As invariably seems to always befit a perfect storm, this was also the absolute bottom of the market. The correction and consequent market bounce transpired on Monday December 14, however the loss making positions were already realised and the fund was thus unable to fully participate in the rebound.”

Performance of the Third Circle MET Target Return Fund from October 2015


Source: Morningstar 

Fund reporting and governance standards

Compounding the issue of the fund performance is that the extent of the derivative positions in the fund was not disclosed on its fact sheet. According to the minimum disclosure document (MDD) produced by Third Circle and Metropolitan Collective Investments at the end of November, the fund held 96.14% of its assets in cash or money market instruments.

Lane said that this is “technically correct”, however it includes amounts in a settlement account and the JSE/Safex margin account. These would be its derivative positions. Third Circle even produced and published on its website an MDD for the end of December showing an asset allocation of 97.89% to cash and the money market.

When this was queried by Moneyweb, however, Third Circle came up with a new document that reflected only 43.47% in cash, and derivative exposure of 43.42%. Strangely, the second fact sheet also showed foreign equity exposure of over 10%, which is not mentioned in the first fact sheet or in the fund’s detailed portfolio for the end of December.

The CEO of Metropolitan Collective Investments, Mickey Gambale, told Moneyweb that neither of these fact sheets were approved by them as administrators and they are now querying why Third Circle produced them.

He added that they are conducting a thorough analysis of the portfolio to look at exactly what happened in December. They are looking at how each option behaved and where mistakes might have been made.

“MetCI immediately started an investigation on the large market movement on this portfolio to ascertain the exact root cause,” Gambale said. “We are currently in the process of identifying the instruments within the portfolio attributable to the performance loss in order to get a complete and full understanding of the events which caused it. Currently our investigations are still under way and we are in discussions with the portfolio manager, our trustees, and our own internal risk and compliance teams.”

He however added that he does not believe that the fund’s portfolio was in contravention of CISCA guidelines.

This is a view that appears to be shared by the Financial Services Board (FSB). Jurgen Boyd, the deputy executive offer for Collective Investment Schemes at the FSB, told Moneyweb that they currently do not see a need to investigate.

“From our perspective, based on the information as at December 31, 2015, notwithstanding the losses, the manager continues to comply with investment policy,” he said. “As with other types of investments, the investor takes investment risk and the registrar does not interfere nor investigate investment losses in relation to the level of risk of an investment.”

Moneyweb also approached Standard Bank for comment, but the bank declined to add anything to what Metropolitan Collective Investments had already told us. It did however confirm that it was working with the administrator on the matter.




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I quote “The primary objective of the Third Circle MET Target Return Fund is to offer stable positive returns ….. The portfolio aims to deliver this in all market circumstances (rising and falling markets) “. well well – what did warren buffet say “you only get to see what swimmers people are wearing when the tide goes out”! well the tide has really gone out for the poor suckers involved in this fund. I have made a previous comment elsewhere abt trusting your money to managers – who no matter what WILL charge their fees to you!

The tail-event caused by Zuma, caused the condor option structure to crash into the butterfly structure, the wings fell off and the body blew up, leaving the investors with a margin call.
This is how zero-cost exotic option structures become very expensive.

Maybe this will cause those who sing the praises of the smaller, ostensibly more fleet footed, “boutique” managers to rethink their enthusiasm. The mere use of the word boutique should cause you to rethink your choices

It really bugs me that as a holder of a Living Annuity I am forced to place my life savings in the hands of fund managers. Imagine the retired person who had an LA with this garbage as an underlying investment.

IMPORTANT WARNING …..look at your Fund fact Sheet and be horrified at some of the garbage that finds its way into some unit trusts. Managers need to realise that this is not their money to gamble with.

I think we should be fair and not paint everyone with the same brush. There are some exceptional boutique managers in South Africa. What happens to one asset manager should not be used to justify a view of all asset managers.

Fair enough. But this reliance on derivatives should be regulated. Derivatives add no long term value, nor do they protect anyone who happens to be at the wrong end of an option, which seems to be the case in this example. I would go a stage further and ban all derivative usage in retirement funding portfolios.

Actually you are not forced to place your LA in the hands of a fund manager. You can setup a Personal Share Account in your LA, and as there are no Reg 28 compliant requirements, you can do an asset swap for 100% of the portfolio and buy offshore shares.

An LA is a truly flexible investment vehicle. Do the research or get a proper planner.

Thanks for that. Can you advise any specific place e to start my own research please

Thank you Charles for informing the readers. I am managing my LA myself for the the last 2 years and was not aware that Reg. 28 does not apply to LA’s (no one will tell you a thing if you are managing your own finances). I stumbled on this in a financial magazine article and since October my investment is mainly in off-shore unit trusts, I keep the off-shore portfolio balanced – property cash en equities and it is multipylying like a virus!

How do you do this?

Start by looking at the options on the Admin platform where your LA is currently housed. For instance, a company like Momentum Wealth has a host of stock brokers who provide managed Personal Share Portfolios (PSP’s) or provide you with a deal and execution account mandate.

You would need to deal with the stock broker and essentially swtich (no CGT in a LA) your funds into the PSP account. You can then purchase Rand hedges, DBX trackers, ETN (such as ABSA dollar) and basically have a fully Rand hedge portfolio.

Alternatively the administration platform can perform an asset swap (for an annual fee) and you would utilize the services of an offshore based brokerage.

I would highly recommend getting advice on this, even if it is just a time based consultation, as there are risks – portfolio concentration, draw down requirements, and even the unthinkable – the Rand strengthening dramatically.


Clearly fraudulent mentality mixed with a healthy dose of incompetence.

Thank goodness for the clients that this ‘collection of brilliant minds’ (sic) emphasize ‘safety’ in their investment ‘process’.

A look at the website of Third Circle gives the average investor considerable peace of mind(not).Do this crowd really know what they doing,or as it appears,just speculating ,leaving the investor seriously out of pocket.Some further investigation needs to be done and trustees need to accept some responsibility here as well.

The Trustees being Standard Bank. In other words the same Standard Bank that stood by and watched group subsidiary Stanlib bung about R3 billion worth of investors funds into ABIL Retention Funds 18 months ago and counting

My money is invested at bank in boring fixed investments at 7%pa. No costs plus a taxbreak. If an investment cannot be explained in 10 words or less without words like derivatives or future positions or several tiers of fee structures etc I steer away. Seems nobody really knows what it means. Sounds more like plain old gambling to me. With other people’s money of course. And getting paid for it.

Your current “investment” in an interest-bearing instrument at the bank can be described in under 10 words – “you are subsidizing the salary of a mine worker”.

The salary of a mine worker will keep up with inflation, while the purchasing power of your capital won’t. Your capital is being redistributed by stealth because you don’t want long explanations.

Wow this is some loss. I hope we do not read similar reports on Orbis what with their high risk Russian investments that get worth less and less weekly.

May be you should take some time and look at the Russian Investments you are mentioning. It has been in a rising trend while the rest of the world is in a bear market.

MICEX up from 1500 to 1723 from Jan 2014 to Feb 2016.

Yarwell no fine. I used to be a employee pension fund trustee for about 15 years.

My view, maybe legislation changed, but as far as I can remember, exotic options is a big no no, and in contravention of the pensions act etc etc (maybe somebody can help me with the latest regulations?). The administrators and trustees are supposed to be compliant with these type of derivative transactions (maybe they are?)

However, from my derivative dealings in FX Treasury I know that anybody (fund manager) that buys ” a zero cost exotic structure”‘, with other people’s money, is a cowboy!

Our friends Investec sold that ”naked option ” rubbish to Brett Kebble and he entered into derivative structures with infinite upside loss potential. I think Brett obviously did not understand the ”naked option ” dangers and was led to believe that he was hedged, in line with his view and that he is covered, should the gold price fall any lower. Brett’s loss (50 % South Deep) on the 12 year forward production that was ”sold”, grew from about R70 million to R 4 billion when the book was sold to Gold Fields (calculate that percentage loss and then ask the question why nobody to date – like FSB or SARB) ever queried this practice). I believe that a lot of people lost their mining jobs in the process and when miners jump up and down, they get ”Marikanad”!

How did JCI account for these losses on their Western Areas book ( they were selling 12 year future gold production ) , as they did not know the actual prices, despite the fact that the actual losses in the structure grew exponentially , by the day?. How did the auditors sign this off?

What baffles me is how the fund accumulated any assets at all after suffering from a similar ‘incident’ in May/June 2013 where the fund NAV fell 25% (in one month)…

BUT, upon further investigation it appears that some other Fund of Funds (notably Kanaan’s suite of FoF’s) supported this fund and also suffered major losses.

So the regulator should indeed investigate. Firstly, Third Circle should be investigated for the improper/imprudent use of derivatives and secondly, these fund of fund managers should be fined for failing to understand the product they are investing their clients in.

I really feel sorry for investors who are conned by these ‘fund managers’.

Thanks for pointing out the fall of this fund in 2013. Another stat for this fund:between 11-27 Aug 2015 this fund fell 23%(the market only went down 9%). Seems like these cowboys are enjoying themselves with other peoples money.
I always thought a target return fund would also produce stable returns. Surely 66%(2 days), 31%(30 days) and 23%(16 days) drops of this fund is no joke.
As a long term fancier of boutique funds one has to look at the record of the fund manager before investing.

The bashing of derivatives is misplaced. Derivatives form an important part of fund management and now days most, if not all, fund managers utilise them to some extent. The problem in this case seems to be a total lack of risk management and oversight coupled with a fund manager who was obviously taking excessive risk. There will always be cowboys out there. Don’t ban the instruments, make sure the person or company that you have entrusted to manage these instruments have the correct skill, integrity and risk management. There are funds out there that have had constant under performance due to their value philosophy – do we then ban value strategies/philosophies? Obviously not!
Lastly, the talk about ‘zero-cost’ derivative strategies being high risk is total nonsense – the fact that it is zero-cost has nothing to do with it. The majority of protection strategies that fund managers utilise involve ‘zero-premium/cost’. This just means that more often than not, upside is capped (i.e. give away some upside to get a bit of protection – nothing wrong with that).

I am not bashing derivatives at all. There are only about 4/5 derivatives in this market that I think should be allowed . With all of them you know the maximum loss you can take, be it upside or down side.

Vanilla derivative structures should be the only structures allowed when fund managers start hedging with other peoples money . Any zero cost premium structures (exotic structures) actually works like building blocks that you keep adding to the vanilla structure and is extremely dangerous if you don;t know the mechanics of that product, like lots of fund managers don’t.

The zero cost (premium ), what you call protection structures does not allow the hedge that you believe they do. It also means that not only the ”upside is capped”, but also that another down leg is added, with a very wide spread , to incorporate the premium that is not paid!

”If nothing is wrong with that”, why did they incur such a big loss?

Whose job is it to make sure that a so-called educated idiot, with no official financial markets training and experience is gambling with you money?

Derivatives might form a big part of fund management, hence their pathetic performance…only funds really making money was hedged in the rand hedged stocks due to a 45 % devaluation last year.

That’s all very well, but if the stock exchanges of the world had stuck to the original function of a bourse, namely to invest in shares for the purpose of financing the operations of the companies they are investing in, there would have been no need to create all the derivatives and options we see today. But no, traders got greedy and started to use stock exchanges as gambling emporiums. It’s far too late to unwind all this activity that’s been going on for over a century, but there is a need to regulate the use of derivatives especially in the case of retirement funds. And then there is short selling which is also a gamble. What logic underlies the idea that you can sell something you don’t own? My argument will, of course, be treated with contempt but I’m sticking to it.

But wait … This is the same MetCI who was responsible for the local Kellermann / Belvedere fund administration isn’t it? Did Mickey Gambale take over from Kevin Hinton ? No prizes to find the common denominator here.

Third Circle should consider a name change to Three Ring Circus.

Grab your forks and light your torches… Lets rally, because #DerivativesMustFall ! Really?! It’s an asset class like any other and is probably used in most of the Pension Funds in SA as well as around the world. The focus in the debate and investigation should be on the manager and the required skill and competence, did they break any ASISA/scheme rules and probably 3rd the over sight don’t you agree? Lots more time and info should become available before we hashtag another letter/word…I agree though, it is a shame that a single manager can create this much hype and uncertainty in a normally trusted and reputable industry!

for those who have seen the “big short” here is excellent docu on derivatives, quants and how investors CANNOT beat the traders:

Very interesting video.

Some of us would know that 90% of traders loose 90% of their money in the 1st 90 days. Long term investors would over the long term grow their capital if diversified.

Google youtube Anton Kreil it would be worth it!!!!

No need to investigate when the manager admits that the margin account at JSE/Safex is reported as cash while the “investment” sits in high leverage option contracts?

Nothing wrong with quickly producing a different MDD.

Once again we see no action by the FSB.

Losing 66% in 2 days while the financial index rebounded 90% back in the next 9 trading days. We are told that unit trusts are LONG TERM investments.

End of comments.





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