Cape Town – More than eight months after the Third Circle MET Target Return Fund lost 66% in two days, MET Collective Investments (MetCI) has acknowledged that the derivative structures used in the portfolio led to inappropriate risk exposures. In an exclusive call with Moneyweb on Thursday evening, MetCI’s CEO, Etienne Gouws revealed that they had given notice on all contractual agreements with Third Circle Asset Management, effectively removing them as managers of the co-branded funds that carry their name.
This comes after an extensive process to analyse the cause of the losses that MetCI CEO Etienne Gouws says went “beyond industry practice”. An independent risk insight specialist was engaged to conduct a thorough investigation into the portfolio, and what was revealed has now caused MetCI to take action.
“We found elements within the portfolio that we weren’t comfortable with,” Gouws explained. “Third Circle had employed derivative strategies within the portfolio that ultimately led to effective exposure levels that we just felt were not in line with what we believe is appropriate for these particular mandates as well as the intent of the unit trust framework.”
This candid acknowledgement may not offer any compensation after the fact, but it is at least a refreshing reversal from the rebuttals offered by MetCI earlier in the year.
Gouws however stressed that the stated net asset value of the Third Circle Funds was not in question. Investors should therefore not be concerned about any adverse effects of this transition to the new portfolio manager, Momentum Outcome Based Solutions, although MetCI will be restricting withdrawals until the process is complete.
“We met with Third Circle and agreed that that we as MetCI will become actively involved in the oversight of day to day portfolio management,” Gouws explained. “We will also be appointing a third party transition manager to assist us to de-risk some of the portfolios.
“Until then we will be restricting the funds so that we ensure that all investors are treated fairly,” he added. “What we want to do as far as possible is to allow existing regular instructions such as annuity payments or regular income payments for clients. But what we don’t want is a group of clients submitting large withdrawals which unintentionally affect the remaining investors.”
Gouws was adamant that the interests of investors would be paramount at all times.
“The common objective for all of us is to protect the interests of investors in this process and ensure that they are looked after,” he stressed. “What we are acutely aware of is that we don’t want to have a panic reaction that leads to unintended consequences.”
While the action taken by MetCI should provide comfort to investors and restore some measure of integrity, there will still be questions about why it took so long. The losses were sustained in December last year, and it appeared clear from the outset that there must have been elevated risk in the portfolio for such an extreme event to have taken place.
However, Gouws said that what they have now discovered could only have been revealed after extensive analysis.
“The insight that we gained from the risk insight specialists really assisted us to effectively determine the risk levels associated with these portfolios, which wasn’t so obviously evident from the information that we were getting in the normal course of events,” he said. “You really have to dig quite deep to understand the effective exposures here. It did take us perhaps longer that it should have, but now we can deal with the road ahead.”
He added that despite its latest findings, MetCI still maintains that the portfolio was managed in line with regulation when the losses occurred.
“We still, with the information provided, believe that the manager was compliant with regulation and FSB Board Notice 90 in particular,” Gouws said. “What we do however say is on a substantial risk management basis, there are excessive levels of risk. A pure compliance check is not sufficient in its own right to determine that. We went beyond legislated requirements to gain further insight.”
This episode has also led MetCI to enhance its internal risk analysis capabilities.
“We will be applying more substantial risk oversight than we have done in the past and what I believe is the standard in the industry at large at the moment,” Gouws said.
It is also important to note that the action taken by MetCI may also not be the end of the matter. The Financial Services Board is still investigating the Third Circle MET Target Return Fund and the losses it sustained, but there is currently no indication as to when that investigation will be completed.
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