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When advisers take the fall

Nedgroup’s Managed Fund: if it were an airbag it would have been recalled by now.

Financial advisers today operate under a raft of legislation, enough to make even the clearest-headed compliance officer as confused as a chameleon on a box of Smarties.

First there is the Financial Advisery and Intermediary Services Act (Fais Act) which was promulgated in 2002 and implemented in full force since 2004. Then there is Treating Customers Fairly (TCF) as well as the Retail Distribution Review (RDR) currently in the process of being rolled out to the financial intermediary industry.

Financial advisers and intermediaries have been in the cross hairs of the regulators for over 20 years, ever since the collapse of the Masterbond scam but that still did not prevent the likes of the Sharemax and Picvest scams from flourishing and eventually collapsing with billions of rands disappearing into thin air. The advisers, many of whom were duped into selling these flawed products, are the ones now paying the price.

Financial advisers are seemingly always the culprits when things go wrong, particularly in the eyes of certain investors. Disgruntled investors are not shy to run to the Ombud for Financial Services, sometimes on very frivolous grounds. It also does not help much that some of the deliberations of the ombud have been on very shaky grounds, almost every time seemingly bending backwards to find in favour of the complainant.

The ombud has also only published determinations against investment advisers which creates a one-sided opinion in the minds of the public.

It would help if the ombud published the determinations which go in favour of an investment adviser, if only to illustrate that certain complaints are frivolous and groundless.

Several investment advisers have expressed the view that disgruntled clients use the potential of a complaint at the ombud as an ever-present threat against the adviser. I recently met a potential new client and within 30 minutes he told me he’d reported his previous two advisers to the ombud, one known to me. A phone call later and I established that his complaint was without merit (he wanted his adviser to move his living annuity from Ovation when its affairs became intertwined with Fidentia).

When she couldn’t, through no fault of her own, he lodged a complaint at the ombud on the basis of “she should have known”…. Fortunately his case was thrown out but the time and effort, not to mention the mental anguish that comes with defending such a complaint, was massive. I politely declined to take on this particular client. Forewarned is forearmed.

Many advisers openly admit that they have a little slush fund to be used in case a client threatens to lodge a complaint against them. Defending a case at the ombud is perceived to be a lottery, and they would rather pay some money than run the risk of losing a case which would have serious reputational consequences and possibly even the loss of an investment licence.

Product providers not treated the same

Product providers, on the other hand, seem to be getting of scot-free. There seems to be very little in terms of sanctions against product providers, be it as a fund manager or investment platform. They have conveniently shielded themselves from most of the regulatory sanctions that can be used against advisers.

The financial services industry is massive – one of the largest in the country with assets under management of about R3 trillion – and it has enormous amounts of money and influence to protect its turf. It has always astounded me how the large life-insurance companies, which created and foisted many toxic investment products onto the investing public in the not-too-distant past, now try to proclaim themselves to be the white-knights coming to the rescue of investors.

In a future column will I discuss some of these products, including back-to-back policies, 30-year endowments, smooth-bonus type policies and loan-backed endowment policies. A younger generation of investor (or advisers) would be aghast as to what these ethical financial giants used to sell to the unsuspecting public not so long ago.

The advice business still remains, for the most part, a largely fragmented and disparate group of individuals, with very little organised lobbying at the regulator on issues that concern it.

Perhaps I can be accused of being a little churlish but I seriously have a problem with the manner in which Nedgroup Collective Investments is handling the poor performance of its Nedgroup Managed Fund, one of the largest of the 43 funds that it manages under the Best-of-Breed (B-o-B) banner.

In terms of B-o-B, Negroup does not have its own in-house fund managers but rather smartly has gone to the market on the basis that it will select the B-o-B for the various asset classes that it offers to its retail clients. By and large it has been very successful, piggy-backing on hand-picking existing asset management companies to manage a portion of their funds.

For the fund managers themselves this is great because they don’t have to set up large and expensive distribution arms, but can rely on the very large marketing network of the thousands of Nedgroup investment advisers and independent investment advisers to shovel money their way.

When I wrote in December 2014 about the poor performance of the R5 billion Nedgroup Managed Fund, managed by value-style RECM, I was told that it was too soon to make a call on the fund’s underperformance. In addition, I was told Nedgroup does not like changing its fund managers too often.

It’s no secret in the investment industry that the value-style managers have had a very poor time in recent years, mainly due to the collapse in the commodity cycle.

Three months or so ago, however, it changed fund managers at its Global Cautious Fund, from JP Morgan to little-known The Killen Group in the United States. It’s telling what was said at the official announcement of this change-over in March. Simon Watts, senior investment analyst at Nedgroup Investments was quoted as follows: “The key attributes the Killen Group offered were stability, alignment of interests, consistency and strong long-term performance.”

The Nedgroup Managed Fund, on the other hand, has probably the worst short- and long-term track record for any fund I have ever seen. I have to wonder how retail investors would react if they truly knew just how poorly its so-called B-o-B fund has done over any period of time over the past ten years.

The chart enclosed tells one story but when you break up the performance of the fund against its peers, ranging from one month to ten years, you get the following picture:

Screen Shot 2015-06-17 at 5.01.44 PM

YTD (128/128), one month (135/142), 3 months (136/136), six months (127/127), 1 year (116/116), 3 years (90/91), 5 years (65/66), 7 years $2/53) and 10 years 29/31).

All these figures are from the Morningstar survey to end May 2015.

When discussing this issue with Shaun Anderson, one of the senior executives at Nedgroup Investments last week, he agreed that the fund performance has not been good.

“Yes we are aware that performance is not good, and there are a lot of unhappy clients out there (more than R1 billion has been withdrawn in the last six months), but we will change fund managers when we change fund managers,” he said.

I don’t care one way or the other whether Nedgroup sticks to RECM as its fund manager or not,  but I do care when it markets its offering to the investing public as the B-o-B, which in this case it clearly is not.

How would you, dear investor, feel if the balanced fund you were recommended by your Nedbank adviser loses you 10% in your first year as an investor, while the average in our peer group returned almost 8%.

And here again you can see the fault line in the greater investment space: the poor adviser takes the fall again. There is no recourse against the fund manager of the investment house, only against the adviser at the ombud.

Sir John Maynard Keynes, founder of modern day economics once said: “When my information changes, I alter my conclusions. What do you do sir?”

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at for ideas and suggestions.



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I think the fact that fund managers have the freedom of determining their own investment philosophy and how they will invest in the market as a whole, makes it very difficult to regulate the industry as a complete piece of the pie.

This does not even compare to some of the “cowboys” out there that invest on behalf of their clients because the average Joe lacks even basic investment and financial acumen.

The real problem is definitely not with financial adviser, but with the client’s lack of knowledge. After cases like Sharemax, every medium to small sized fund manager became “guilty until proven innocent”.

As long as fund managers are free to determine how, where and when they will invest, it will be very, very difficult to regulate their industry.

If every investment product can be regulated to a certain extent, it may solve a small piece of the puzzle, but I cannot see any more stringent regulation on fund managers.

Just imagine the PT involved in regulating every single investment product that the market has to offer.

I was at a presentation by a large insurer that has tied up with a large international concern to gain offshore exposure for clients. This is the disclaimer on a product brochure which is in the public domain that is currently being marketed by them. Should an advisor promote this product then they would be responsible for it, or that is the perception that they provide a blanket guarantee for everything. After reading this disclaimer think about who you would crucify to get your money back when things go wrong. You don’t have recourse against the investment companies, as they have made it clear that they may even act contrary to your interests. The local co that promotes the investment and provides the brochure is also strangely not an agent of the Int Co that offers the investment. The International Co does not in any way sponsor, endorse, sell or promote the product. Kind of leaves you speechless…Maybe advisors should adopt these disclaimers as well and only give factual advice, then nobody will be responsible for anything:

Local Ins Co disclaimer:
The opinions in this document apply from the date we made this brochure available and are relevant for this document only. The information and opinions are purely for information purposes and are not advice as contemplated in the Financial Advisory and Intermediary Services Act (FAIS). No one should act on the basis of any information in
this brochure without considering and taking the necessary advice for their own specific circumstances.
The information we have used to prepare this brochure includes information from third-party sources. While every effort has been made to make sure it is accurate and complete, we cannot guarantee it. Nor can we guarantee that the information is always up to date.
(Local Co) is not responsible for any use of this brochure, nor are we responsible to any other person or entity for any inaccurate information in it or for any error or omission, regardless of the cause of the inaccuracy, error or omission.
It is important to know that past performance is not necessarily an indication of future performance. An investor with a different reference currency from that in which the fund is denominated may be subject to exchange rate movements, which will cause fluctuations in the value of their investments. Investments involving exposure to other currencies
other than that in which the investment component is denominated may also cause investment values to fluctuate.

International Co Disclaimer:
The Index Calculation Agent and the Index Sponsor of (the “Index”) do not in any way sponsor, endorse, sell or promote the (PRODUCT NAME). They make no representations whatsoever, including regarding any results from the use of the Index or any of its components or the
levels at which the Index or any of its components may stand at any time. The Index methodology embeds certain variable costs. Potential conflicts of interest could arise as (Int Co name) (or its affiliates) may act in a number of different capacities in relation to the (PRODUCT NAME). The needs of any investors in the (PRODUCT NAME)
may not be considered in maintaining or calculating the Index.
Neither the Index Calculation Agent nor the Index Sponsor has any obligation to:
(a) maintain the calculation or publication of the Index;
(b) advise any person of a change in methodology, errors or omissions in relation to the Index; or
(c) provide information as to Index levels or as to the methodology used for their calculation. The Index may be suspended and/or have its components replaced in certain circumstances. The accuracy or completeness of the Index methodology is not guaranteed and no party accepts any liability for errors or omissions in the Index level. Investors in the (PRODUCT NAME) have no direct recourse to the Index Calculation Agent or the Index Sponsor at any time.
The content of this brochure was prepared by (LOCAL CO NAME). The capital protection in this product is provided by (INT CO NAME). (INT CO NAME) and their affiliates accept no responsibility for the correctness of the information contained herein. (LOCAL CO) is not an agent of (INT CO).

Discalimers mean zero if they are unreasonable. This needs to be tested thoroughly in SA.

Magnus, by your own count Nedgroup offers 42 other portfolios. If you don’t believe in, or have lost faith in, the deep value philosophy of the Managed Fund then invest in a fund with a philosophy/strategy more aligned to your own. Enough with hammering the deep value fund that has been managed according to its mandate. If any advisor advised clients to invest in this fund without properly understanding the nature of the fund and how it would likely perform in different market environments, the advisor deserves whatever flack they are getting from their clients. If clients had been properly informed and educated at the time the investment was made they may need re-assuring that the fund is being managed to mandate, but they should not need to be persuaded now that the deep value philosophy is appropriate for them.

The managed per mandate is junk and an excuse. It is simply unprovable. The reason that this Managed fund is a disaster is that the investment managers have made bad investments. The price falls with the market. The unconciounable actions by Nedbank are that they have consistently defended the performance failure as deep value. Any body believing ‘deep value’ as a reason is wrong bigtime.

100% agree MH. Nedbank s/be fined by a regulator and at the very least management fees refunded to investors. Yours truly has corresponded with NB for over 2 years on this mess with no change. They have been RECKLESS with investors funds and punishment is due. Their latest response as you have reported is breathtakingly arrogant. Please advise how a private invvestor can take this up with the regulatory authorities. If this was offshore there would have been Rand millions of penalties.

I reckon every financial advisor should be able to take the good with the bad…

In as much as you are able to take the credit and commissions in times of boom, you should, to some extent at least, be held accountable when returns underwhelm, or any other non-pleasant issue arises.
No Financial Advisor ever said ‘it wasn’t me but the market rallying’ when returns were in spectacular double-digit territory, you took the applause then, and In so doing, should be able to take the heat when things aren’t as rosy, after all, your are a financial ADVISOR, not caretaker.

That said, every F.A’s job is naturally easier during times of boom, as everything you touch inevitably turns into ‘gold’ and you can’t put a foot wrong, not so much in bearish times, where your actual skill and investment acumen is placed under the radar and heavily scrutinized, then only does the blame-shifting begin, and the product provider is brought into question.

I have been a fierce critic of the poor performance of the fund and the somewhat blase approach of Viljoen and co.Deep value hogwash or not ,the fact remains that poor investment decisions were made which will cost RE CM their mandate on this one at some stage or prevent any future mandates as they have acquitted themselves poorly on this one.But as casual observer has commented ,their are 42 other funds which Nedgroup offers ,many of which have been exceptional and some fault does lie with an adviser if they were over the past 18 months still using these funds..The Best of Breed approach has worked up to now and Heystek is flogging a dead horse ,even though i do think that RE CM have done its clients ,advisors and Nedgroup a huge disservice and not taken its mandate seriously enough.

And that, kiddies, is why diversification is so important.

The ombud’s rulings against advisers have been for blatantly disregarding FAIS and putting clients in inappropriate, high-risk investments (some of which have turned out to be scams). There is a big difference between these risky, largely non-regulated schemes, such as property syndications, and unit trusts that simply perform badly.

Magnus, you’ve written about this before – time to move on. You, as an advisor, know ReCM is the fund manager so are free to pick another fund for your clients. Maybe advisors just piggy back on the great work Nedgroup is doing and now moan and groan over 1 dog amongst many diamonds. I suspect advisors blame Nedgroup for the Managed Fund performance but claim credit for the stellar performance of the other Nedgroup funds.

It’s one thing to look at the underperformance over a given time period, it is another to work out what rate return is required per annum to even get back to parity with peers or its benchmark which ever you prefer over say a 5 year timeframe. Once you work the required rate of return you can judge the scale of performance required going forward to try and live up to B-o-B target. Remembering the longer underperformance or outperformance goes on then cumulative affects also come into play

End of comments.



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