“The value of African Bank (Abil) stock ended the day at 50 cents (7 Aug 2014), almost 93% down from R6.88 on Tuesday (5 Aug 2014).”
The Abil crisis has caused panic amongst investors who all want to know how much Abil’s collapse will affect them.
Lack of transparency of unit trusts
If one has a personal stock portfolio, it is quite simple to calculate the capital loss caused by the Abil crash. This is not necessarily so if you are invested in unit trusts. This is because of the lack of transparency of some unit trusts.
All unit trusts have to produce monthly factsheets which provide details of performance figures, investment objectives, fees and other information. In addition, factsheets usually show the current asset allocation as well as the top 10 largest holdings in a unit trust. These holdings are often updated monthly, but some managers only provide quarterly information. These top 10 holdings usually account for anything from 10% to 60% of the total holdings of the unit trust, depending on how concentrated a portfolio the unit trust has. None of these factsheets, nor any other freely available literature, ever shows the full holdings of the unit trust. Hence in this case, it is impossible to verify how much of a unit trust is exposed to Abil stock, preference shares or bonds.
Why transparency is so important for multi-managers
A competent multi-manager should be focused much more on risk than past performance, both when initially selecting a unit trust and in the ongoing monitoring of a unit trust in which they are invested. Risk assessment is a major part of the due diligence process and is one of primary benefits of investing in multi-management funds. Portfolio risk is assessed in many ways, here are three of the most important:
Firstly the historical risk of a portfolio can be analysed by calculating common risk measures like standard deviation, Sharpe and Sortino ratios. These measures are calculated from past performance figures.
Secondly the multi-manager can conduct an attribution analysis to assess the relative risk a manager takes compared to the market, a benchmark or other unit trusts with similar investment mandates. To do this analysis, regular, complete and up-to-date holdings of the portfolio are required.
Thirdly, current holdings of a unit trust can be used in a scenario analysis to see how the manager would perform in certain conditions including changes to exchange rates, interest rates, commodity prices and other economic factors. Again, complete and current holdings are required for such an analysis.
Hence full transparency of a unit trust’s holdings is crucial for a multi-manager to make a proper risk assessment.
How opaque are unit trusts?
As an example of the lack of transparency, data from Morningstar was used to analyse 15 of the largest funds in the popular ASISA South African Multi Asset High Equity category – where most balanced funds reside. These funds contain R320bn of retail clients’ investments. It was found that 6 of the 15 funds did not have up-to-date holdings, with most being 3 to 6 months out-of-date and one fund being 2 years out-of-date! The alarming issue is that these 6 funds account for over R227bn of investors’ assets.
Why are some unit trusts not fully transparent?
The argument that is often given by asset managers who delay the publishing of their holdings is that they are protecting their investment ideas – their intellectual property – something that they spend much time and money developing. This argument has some merit, however it is difficult to believe that publishing quarterly holdings – which are delayed by at least one month due to the process of gathering the information – would really have such an effect on their portfolios. Imitators would struggle to achieve the same investment returns if they only had quarterly data to copy.
What should be done about this lack of transparency?
The Association of Savings and Investment in South Africa (ASISA) is the self-regulating body made up of most of the asset management houses in South Africa. ASISA’s aim as stated on its website includes: “ensuringthat the South African savings and investment industry remains relevant and sustainable into the future in the interest not only of ASISA and its members, but also the country and its citizens” should look at this issue of lack of transparency and come to an agreement that all asset managers should abide by.
In the end, investors have a right to know what they are invested in – it is after all their money!
If you have any questions about concentration risk in your portfolio, contact us to do a portfolio review.
Written by Greg Flash
GCI Asset Consulting