Boutique investment firm Quantum Asset Management and discretionary fund manager Morningstar Investment Management have separately approached the Financial Sector Conduct Authority (FSCA) to ask it to investigate how Stanlib has handled the winding down of the Stanlib Africa Property Fund. The unit trust was closed in August 2017 after it received a number of large withdrawal requests, but assets left stranded in the fund have now lost three quarters of their value.
Stanlib decided to close and liquidate the fund more than two years ago, in an attempt to protect investors after certain holdings had become problematic. Around 24% of its portfolio at the time was held in listed property in Zimbabwe, Mauritius and Nigeria. Currency shortages in Zimbabwe meant that it was impossible to get money out of the country, and the stocks in Mauritius and Nigeria were so thinly traded that it wasn’t possible to sell them at a fair price.
Liquidating the fund was, however, hardly an ideal outcome. It raised questions about Stanlib’s handling of the liquidity risk in the portfolio, and has left investors in a compromised position.
That is because, 24 months later, the Zimbabwean, Mauritian and Nigerian assets still can’t be sold. They remain in the portfolio, and their value has fallen by 75%.
Quantum held the Stanlib Africa Property Fund in three of its funds of funds. Its submission to the FSCA notes that another 23 funds co-branded with Boutique Collective Investments (BCI) were also invested in the Stanlib Africa Property Fund.
While Morningstar Investment Management did not invest in the fund itself, it took over the management of three unit trusts that had prior allocations to it. Both Quantum and Morningstar now argue that investors have been prejudiced due to decisions made by Stanlib.
“The most important aspect for us is the fair treatment for end investors,” states Victoria Reuvers, senior portfolio manager at Morningstar. “We would never recommend investing into a retail product offering that cannot offer daily liquidity and are very disappointed in the detriment that has been created by the inability for liquidity to be managed in this fund.”
The Stanlib Africa Property Fund was launched in 2012 and only marketed to institutional investors. No individuals invested directly in the fund, but because it was used in a number of fund of funds they were the ultimate investors in some cases.
The fund aimed to provide exposure to a potentially high growth sector in high growth African economies. Stanlib was however always clear that it was a high risk investment. The fact sheet also stated that “where exposure to foreign investments is included in the fund there may be additional risks, such as potential constraints on liquidity and the repatriation of funds”.
These potential liquidity problems were a concern for many investors from the start. African stock markets outside of South Africa are generally illiquid, and investing in only a narrow sector like listed property is even more so.
Stanlib however allayed some of these fears by providing an undertaking that it would always provide liquidity in the fund within 30 days. The liquidity disclaimer, signed by two senior Stanlib executives in 2014, adds that “we do not foresee at this stage having liquidity issues going forward”.
That confidence was, unfortunately, misplaced.
The lack of liquidity in the holdings in Zimbabwe, Mauritius and Nigeria is ultimately what forced the fund to close.
The explanation from Stanlib CEO Derrick Msibi for this is that: “The letters addressed to clients in 2014 made reference to liquidity for repurchase purposes. You need to make sure when you run a collective investment scheme that each time clients come for a repurchase you are able to meet their redemption requirements. What the letter doesn’t say is that in any given circumstance the fund is never going to be in a wind-up state. That is not a guarantee that any collective scheme can give.”
In other words, Stanlib’s position is that it only guaranteed liquidity as long as the fund was liquid. This is an argument that investors have found frustrating.
Investors have also questioned how Stanlib could have confidently invested in assets that it has now been unable to dispose of for more than two years. A measure of restricted liquidity is understandable in a fund like this, but investors have raised concerns around whether listed securities that trade this thinly belong in a unit trust.
Stanlib argues that its due diligence was thorough and that investors accepted the risks. Changes to market conditions could not have been foreseen.
“We are very disappointed with the outcome and what has happened to investors,” says Msibi.
“The whole African story was very promising and we put our best people together to come up with something investors would like. Unfortunately circumstances changed.”
However, the investors raising concerns have asked whether the risks of investing in Zimbabwe, which has faced currency liquidity problems for a decade, were really unforeseen. The liquidity of stocks in Mauritius and Nigeria should also have been known.
“If you are an asset manager, we believe you have a duty to investors,” Reuvers points out. “If you are going to put assets into a unit trust, then daily liquidity is part of the rules that govern those investments. If there is a material potential that assets could become illiquid or that there are political concerns that could restrict getting your money back, that should be part of your due diligence.”
The BCI offer
Quantum has also highlighted that towards the end of 2018 BCI offered to buy out their position in the Stanlib Africa Property Fund, and those of other BCI co-branded funds, at a 50% discount. By this stage all the other assets in the portfolio had been sold, with the cash distributed to investors. Only the Zimbabwean, Mauritian and Nigerian securities remained.
BCI made the offer in an effort to ensure that the end investors at least saw something out of this holding. Initially, Stanlib indicated that it would be able to “carve out” a portion of the fund to allow this to happen.
However, when asked whether this would be advisable, a senior Stanlib representative told Quantum that the 50% loss they would be taking was not realistic and that the assets would realise their full value. On the basis of this advice, Quantum argues, it declined to take the BCI offer.
In the months that followed, however, the assets fell by 75%, which raised further questions around the prior valuation of these assets and the fiduciary duty of the independent trustees to provide oversight on such valuation. Investors are therefore now in a worse position than they would be had the BCI offer been taken.
Stanlib, however, contends that it did not provide advice on this issue. It simply gave an opinion on the value of the assets.
In any case, it argues that this is a moot point because not only did BCI withdraw the offer, but further investigation revealed that it could not have been executed. Stanlib believes that such a transfer falls outside of what is allowed by law.
“Stanlib was willing to consider any possible solution, including the BCI offer,” says Msibi.“The process was halted by BCI prior to us finalising internal approvals, including legal and compliance sign-off.
“BCI requested that the process be halted due to the devaluation of the Zimbabwean currency. However, if BCI had proceeded with their offer, it would not have been approved given regulatory limitations.”
The FSCA has told Moneyweb that the law doesn’t explicitly prohibit such a solution. It is however up to the management company to make a decision whether or not it would be in the interests of all investors in the portfolio.
The regulator has confirmed that it is investigating the two complaints it has received. There is however no indication of how long this will take or what potential solutions may be put forward.
“We don’t want to fight with Stanlib,” says Quantum CEO FC Greeff, “but we think they have a responsibility towards the end investor.
“What we suggest is that they should make an offer – take the assets left in the fund onto their balance sheet and provide liquidity to existing investors.”
Stanlib has, however, rejected this suggestion.
“The risks of these assets performing or underperforming are borne by investors,” Msibi says. “We are not happy where this fund ended up, but we set it up for institutional investors to get access to this asset class. We are confident that all investors were treated equally in accordance with the provisions of the legislation.
“If we had breached the mandate, we would be expected to take things onto our balance sheet and take responsibility for where Stanlib has been at fault,” he adds.
“But in this case we did not breach the mandate. The problem is that if we set a precedent, then each time investors find themselves in a pickle we have to bail them out.”