Investors in some 50 money market and income unit trust funds will not, until further notice, be able to access the portion of their investments that was invested in African Bank, because it has been moved into retention, or side-pocket, funds.
The 50 funds this week moved R4.6 billion of clients’ money invested in African Bank bonds and other debt instruments into retention funds. The move may have resulted in a further reduction in some investors’ money market and income fund balances following the write-off of 10 percent of the value in these funds on Monday, August 11.
Investors will now own units in both the original fund and the side-pocket fund (which has the same name as the original fund), and the sum of the values in both funds should be in line with the values after the August 11 write-off, taking into account any market movements since then.
The Financial Services Board (FSB) announced late last week that the regulator would allow unit trust funds to transfer any African Bank debt held by a fund into a retention fund, and the transfers were done on Wednesday. A list of the side-pocket funds and the values transferred is on the FSB website, www.fsb.co.za.
African Bank’s debt instruments are not trading as the market awaits information from the curator appointed to manage African Bank by the Reserve Bank on how much of the debt will be repaid. Interest payments on the instruments have also been suspended.
The FSB says that, as and when the African Bank debt matures and is settled by the bank’s curator, unit holders in the retention portfolios will be paid out their share, or they can reinvest what is realised in their original fund.
The rationale for moving the illiquid African Bank debt into side-pocket funds is to be fair to all investors, big or small, in the funds that held these instruments.
Henk Viljoen, the head of fixed interest at Stanlib, says if a fund retains African Bank debt and many investors leave the fund, the remaining investors will be exposed to a higher percentage of these instruments. Moving the debt to a side-pocket fund also ensures that new investors in the affected funds do not have any exposure to African Bank debt, he says.
There are no timelines on how long it may be before the curator is able to settle the debt or the extent to which this will be possible.
Jurgen Boyd, the deputy registrar for collective investments at the FSB, says that, in the interim, the interest on the debt will accrue to the side-pocket funds. He says many fund managers have decided not to charge any management fees on the side-pocket portfolios.
Investec Asset Management (IAM) has decided not to transfer its funds’ exposure to African Bank debt to side-pocket funds, because it says that it does not believe this is necessary at this time.
Sangeeth Sewnath, the deputy managing director of IAM, says if the concentration of African Bank debt in any of its funds reaches a level where it feels it is necessary to create a side- pocket fund, it will create one.
Nedgroup Investments told its investors this week that it is likely that a well-capitalised, viable new African Bank will emerge, which should be positive for investors in bonds and other fixed-interest investments, known as senior debt.