The recent events around African Bank (Abil) and the way both equity and bond managers were affected came as a shock to many investors. Gone is the myth that asset managers can accurately assess risk, whether they are specialist credit managers or equity analysts. Many of the highest ranked equity and bond managers in the country were badly affected by the unfolding events.
After the dust has started to settle, what has emerged is a picture of a company with a simplistic business model of borrowing from any source at any price, to lend that money on, on an unsecured basis and with what appears to be little in the form of credit risk assessment controls. How that fact eluded the vast majority of active asset managers in South Africa remains a mystery.
Apart from the write-downs, which we have seen featured in media headlines, the past week has proven to be extremely challenging for the South African asset management industry from an administration perspective. The events that unfolded around the collapse of Abil have highlighted a number of key issues:
- The inadequacy of asset management administration systems
- The lack of preparation amongst asset managers for ad hoc shock events
- A lack of cohesion among asset managers when dealing with systemic risk events
Sygnia, as a multi-manager, has been at the forefront of having to deal with the issues as they arose. The continuous revisions of numbers and the inaccuracy of calculations have made our job very difficult. The problems we encountered among large asset managers include, but are not limited to:
ASSET MANAGER 1
After intense media pressure, the asset manager issued revised “performance impact” statements to each investor on 12 August. We immediately picked up the mistakes in the statements we received based on our own calculations and advised the manager of the errors. We received updated statements on 13 August.
ASSET MANAGER 2
On12 August we received four different valuations with respect to all this manager’s money market funds. The updates were received through the day. After we engaged with senior management the numerous revisions were attributed to the inAbility of the administration system to deal with negative yield calculations on Abil instruments, and finger-trouble in arriving at accurate manual calculations.
ASSET MANAGER 3
Faced with significant exposure to Abil, the management went into a “lock down” mode, halting all trading activity as from 8 August. After engagement with senior management on 11 August, we arrived at an action plan with respect to all Sygnia-related assets. Despite numerous follow-ups from Sygnia it took the manager until midday on 13 August to confirm the implementation of the processes agreed on 11 August. Further corrections had to be implemented on 14 August.
ASSET MANAGER 4
The manager made a rudimentary administration error when adjusting yield and market values of Abil instruments, transposing adjustments between the two. The valuations released by the manager for 11 August were thus incorrect. The error was only picked up on 13 August in respect of 12 August valuations. Sygnia had to re-price all its multi-manager portfolios based on that error.
ASSET MANAGER 5
The manager wrote down unsecured debt by 50% on 12 August arguing that there was no case for a 100% write-down just to write-down the remaining exposure to nil on 14 August.
As illustrated above there was no agreement among asset managers on how to revalue unsecured debt instruments. Different managers also applied different rates of discount on different days, which makes analysis of performance very difficult.
The above are just some examples of the issues we have experienced. In reality all asset managers with exposure to Abil have experienced problems in releasing accurate data and valuations.
It is important to note that the above happened against a background of changing legislation and a number of regulatory instructions from the Registrar of Collective Investment Schemes and ASISA. The most significant changes communicated since 8 August include:
- Guidance on how to revalue fixed interest instruments (most administration systems did not have the functionality to allow for this, resulting in manual calculations and numerous errors)
- Signing into law of BN90 of the Collective Investment Schemes Control Act on Friday 8 August without notice to the industry
- Issuance of ring-fencing instructions to the unit trust industry
- Issuance of warnings to asset managers not to act in a way which would prejudice the interests of other investors
The failure of Abil is a catastrophic event on many levels. The immediate intervention by the South African Reserve Bank is to be applauded as it avoided wide-spread panic. However, the events have highlighted the woeful inadequacy of asset management companies and their management to cope with shocks. It has also highlighted weaknesses in administration, credit risk assessment, investment analysis and honest communication.
The asset management industry and ASISA need to take a long and hard look at their processes and responses. More allocation of resources to administration and “back office” operations, as opposed to “front office” investment staff and their bonuses, would not go amiss.
* This report was prepared by Magda Wierzycka, CEO of Sygnia Asset Management