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MetCI fires Third Circle after 66% loss

“In the best interests of investors”.

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.”

Delayed reaction

 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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Active manager risk on stark display.
You don’t have to expose your retirement to this nonsense, despite your adviser’s empty promises about delivering market beating returns.
Use low cost index funds from a dependable manager to build your portfolio and sleep soundly.

This fund was managed by a cowboy-like manager. This is not how a typical active manager would manage a fund. I still belief a lot of blame has to go to METCI. NO targeted return fund should have had the exposure to risk as this fund had. The mere fact that this fund has been as volatile as it has been for years should have prompted METCI to investigate it. Now after the loss is too late. The min discl doc also gave a false impression of underlying investments.

Not called WMD’s for nothing.

The long Condor structure crashed into the short butterfly structure and the wings came off – in laymen terms it is the same as – the option structure was not Zuma-proof. As a matter of fact, not much in this country is Zuma-proof!

Don’t forget about the ”naked” hedge that was sold to Brett Kebble (Western Areas – 12 year ”naked Gold option), by a Investec!

That loss ran into billions –

So ”the chickens have now come home to roost, hasn’t it?
(MetCI) has refused to allow Moneyweb to see the findings of its investigation into the Third Circle MET Target Return Fund, when the $hit hit the fan in December 2015 as the fund lost investors 66 % in just two days. They confirmed that the report would be sent to the FSB, the industry regulator.
The FSB, in my view , has again been ”conspicuous by their absence”, and their conduct to date is most definitely not in the best interests of most of the fund’s clients.
It is still my view that more than 90 % of these ”educated idiots” that are employed as ”derivative specialists” at fund managers, Treasurers of Banks and major Corporations, don’t know their ”@rses from their elbows”, with regards to the risks that they run when using ”non vanilla” derivatives.
According to the latest ”Revelations”, MetCI still maintains that the portfolio was managed in line with regulation when the losses occurred, and that the manager was compliant with regulation and FSB Board Notice 90 in particular.
Oh really, but you do say that, ” on a substantial risk management basis, there are excessive levels of risk.”
My view and experience is that it is ”shocking” to know that ”excessive levels of risk” is allowed and concealed, when people like Moneyweb wants to see the findings of your investigations, with ”pensioners ” money as well!
Etienne Gouws as CEO of MetCi, you should rather forget about the ”industry at large” and sort out the k@k , in the best interests of your clients, in your own backyard! And yes, some of my pension money is also involved and I will move it to a > reputable fund manager, as soon as I can.

Well Put.

Third Circle should have been fired a long time ago,and much like Nedgroup dithered over RE/CM for a long time,a clear case of MET CI dragging their heels.

@ask me I know – How did you get into this fund in the 1st place. I can fully understand that you are not impressed.

Funny how this game is played. Had the trade gone in their favor they would’ve made 66% in 2 days. They would be listed in the most successful funds in SA for 2016. They would receive accolades and no doubt many more people would’ve invested with them.

But because the trade went in the opposite direction, they are lambasted for reckless and high risk trading.

Still, I hope their risk indicator for this fund was clearly marked as HIGH in their prospectus, because they were probably geared to the max on their trades.

You’re right to some extent. The fund did actually perform very well at one point. But even then it was highly volatile.

However, there are two counters to that:

Firstly, this was not a single trade that happened to go wrong. It was the result of extensive derivative structures that were immensely risky. Suffice to say that I don’t believe there was ever any chance of a 66% upside.

Secondly, the fund fact sheet listed this as a “moderate to high risk” fund, and it had a benchmark of cash + 1%. Until the 66% loss, it reported having almost all of its assets in cash. One could therefore argue that it materially misrepresented what the fund was actually doing.

I would not class this fund as a fund that did “perform very well at one point”. A gain of 17% from 09-06-2015 to 20-07-2015(41 days) followed by drop from of 24.6% from 11-08-2015 to 25-08-2015(14days) does not mean doing well for me.

A “Black Swan” called Jacob Zuma sacked Nene and that caused the gamma of the option structure to blow out. This increased the delta to such an extent that a low-risk option structure changed into a high risk futures structure overnight.

Just when they hedged the position, Zuma capitulated and appointed mr. Gordhan. This action whip-lashed the fund managers and left them shell-shocked and disorientated. When the smoke cleared and the dust settled, they realized that they had no position, no margin left, no clients and Moneyweb on their backs.

The only consolation is that it will take the FSB about 500 years to figure out what happened.

The moral of the story is – Africa is lion country – a once-in-100-year event happens weekly.

This increased the delta to such an extent that a low-risk option structure changed into a high risk futures structure overnight.
Only if we are shown the option structure employed would we be in a position to at least say if it was a low risk option structure. Up to that point I would say it was a very high risk structure. I have also traded 10x leverage and in 10 years I never had such a draw down in my own small portfolio – not even in weeks or months let alone 2 days.

It would be interesting if funds could indicate the risks they are not hedged against or just can’t hedge.
To point out the risks that led to big loses after the fact is being lazy.

I used to be a ”employee trustee” for our pension fund for more than 15 years until about 7 years ago. I also don’t know how the regulations changed in the last couple of years but I do know that certain types of derivatives were outlawed then.
When I joined as a trustee and after I completed the compliant trustee judiciary courses to serve as a trustee, I discovered that the fund were running derivative structure that was not allowed. Needless to say that the Principle Officer (an actuary) investment manager (an actuary) and fund valuator 9an actuary) all disagreed with me and claimed that ”the product” wasn’t a derivative, in terms of the law.
Also needless to say, that this structure were closed with the insurance company(one of the big five) after further investigation.
Patrick, maybe you should follow this report up by liaising with the FSB pertaining to the role and admissibility of derivative structures by fund managers with regards to all the relevant funds.

I am a Third Circle investor by choice and have been one for four years now. MetCI claims that it has acted in my best interest, but all income payments from investments in these funds were frozen on the last working day of July. Thousands of pensioners will be left in the lurch for who knows how long. Neither my adviser nor I was consulted or informed about the pending decision so that alternative plans could be arranged to soften the blow of the non-payment. I certainly do not feel as though I have been treated fairly in this process and am sure that many will agree with me.

Income payments frozen… is this “beyond industry practice” I wonder?

Please could you send me an email? I would be very interested to discuss this with you. My contact details are under my profile picture at the top left of the page.

Unfortunately it is too easy to gamble with Other people’s money.

I have two Third Circle investments. One of them is only 19 months old, so the disaster in December 2015 hit hard. I phoned the MD, Hugo Snyman at the time. I found his personal cell number in a marketing document. Lo and behold, he actually took my call and explained in a calm no-holds-barred way exactly what had happened and what it would mean for my investments. My adviser and I were constantly kept in the loop with comprehensive information. I had a careful look at their track record of about seven years at the time and decided that I would trust them to regain the losses, so I left my investments where they were. The portfolios did indeed perform well (as per usual) in difficult circumstances this year and I felt at peace with the fund management team.
Enter MeTCI and chaos ensues. The timing of their ‘rescue action’ alone has my balderdash-radar buzzing. Why after eight long months decide to pull the plug on the very last work day of the month on a company that after two days of horror in December, have regained its balance and sailed on in its usual effective way? (Also note that the FSB apparently found no fault in their conduct). Could the mighty MeTCI not have waited another week to ensure that the pensioners and other investors dependent on their income could honour their debit orders and pay their accounts? Was it honestly necessary to freeze all business immediately and for the foreseeable future? Is this how they treat customers fairly? Really?! Surely so many very clever and well paid people in one place could have come up with a more humane plan of action?
Call me a cynic, but I have a feeling that this is just another case of a huge bully with very deep pockets pounding a little guy into the dust. Methinks that MeTCI are not enamoured of white label funds and Third Circle is just the first of many who will bite the dust due to some poorly fabricated reason… watch your back guys!

Please could you send me an email? I’d like to discuss this with you. My contact details are under my profile pic at the top left of the page.

I think that there is a misunderstanding of the facts. The party that are leaving my parents without income is MetCI because of their actions to freeze the Third Circle Funds. I analyzed the funds and I know that I’m lied to by Momentum Wealth, MetCI and their cronies. The funds were liquid and within the legal framework. How can anybody say that a recovery of 14.35% between 14 December 2014 and 29 July 2016 is not efficient and left my parents with the income

Unfortunately bad news sells and Mr. Cains should get a medal for misrepresenting the facts. He effectively got hold of the tail of the cat and disregarded the facts. I’m sorry for the investors that acted on his advice taking into account of one building block. Instead of looking at the whole picture of 54 building blocks. If you think that you have the whole picture make contact with me, Zolani Madikazi, Hugo Snyman or Dr. Louwrence Erasmus, Dr. Dewald Scholtz because what the average person are being fed on your web is incorrect. Mr. Cains get your facts straight because you are misleading the investment public. You are not what you appear to be. An informed financial journalist.

If you are going to accuse me of misrepresenting facts, you need to be specific about which facts those are. I’m more than happy to discuss this with you. Please send me an email.

Third Circle Asset Management is open for questions from investors and advisers. Please send to tcam@3rdcircle.co.za and we will answer you ASAP.

Wow…for a moment I thought it was scam@3rdcircle.co.za 😉 …..no joke.

True to your pseudonym, you probably thought a bit too much before writing that response(!).

The birdie and the hypothetical story

One day a birdie was telling a hypothetical story…. What if Momentum wants to sell METCI?
Then the birdie started thinking…. But Third Circle’s December track record might be a thorn in the side of a potential buyer?

The birdie wondered…. How could METCI get rid of Third Circle’s December records without losing Third Circle’s client base worth R1600 million?

Then the birdie thought long and hard …. What if METCI could fire Third Circle but keep Third Circle’s clients and their R1600 million? What if METCI claims it’s in the best interest of the clients? …. Sneaky? The potential buyer would be very happy if the clients could stay!

Could it work, birdie thought to himself?

Yes, thinks the birdie ….. Momentum could sell METCI with Third Circle’s clients to a potential buyer without the loss of R1600 million and without Third Circle’s December track records.

Momentum = WIN
Third Circle’s Clients = SLAVES TO BIG CORPORATE
Third Circle = GAME OVER

This birdie does not like this game…. It is NOT a fair game!!!

The birdie wonders ….. Is big corporate using Patrick Cairns to help them keep the focus on Third Circle’s December losses while they steal the clients and assassinate Third Circle?

This birdie thought Mr. Cairns fought for the little guy… Seems he’s been duped into being Momentum’s attack dog!

Bye bye birdie

Birdie forgot to warn all the other fund managers who partner with METCI… and their clients… Watch you back, maybe you’re next!!!!

Bye bye birdie!

METCI should just get rid of the rotten apple as there are great funds and managers between the METCI funds.
36-ONE with 2 funds happen to be 1 of the great asset managers. AUM went up from about R2bil in 2012 to R4bil in 2016 in the 2 funds.

End of comments.

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