My Marriott consultant arranged lunch on Wednesday this week with one of the Marriott Investment Managers. Free lunch is always a good thing.
First we went over the offshore offerings managed out of the Isle of Man. Then he wanted to talk about Bond Funds, and this became very interesting. Bonds are lending instruments, and are used as a straight Bond Fund or as part of Income Funds. Money gets lent out to, hopefully, reputable government institutions or corporations or other, who promise to pay interest on the loan plus the capital back at a later date. The investor – the lender – would be enjoying an income from their money.
He told me of a South African Income Fund that has recently been awarded 1st place in the Income Funds category for 2023 in the Raging Bull awards. These are industry awards for the universe of unit trust funds and investment offerings registered for the South African investor. I don’t think I should name the fund in question, even though it’s public knowledge and in the press.
However, this fund is now in trouble. Why… because nearly 9% of its capital was lent out to the taxi industry, for the taxi groups to finance taxis. I said to him; “But who lends other people’s money to the taxi industry?” Anyway, the taxi associations have for a while now been defaulting in paying back on the loans. This has resulted in around 1 billion Rand of this Income Fund – that’s the 9% – being ringfenced, they also call it side-pocketing, where the capital cannot be redeemed or paid back at this stage and no interest is being paid from this portion anymore. (Remember, interest we receive, from anywhere, is because our money has been lent out to someone else who has to pay a higher interest rate on it.)
Because the loan to the taxi people would have been at an expensive interest rate, the interest from this portion of the fund was very high, paying a rate of 16% per annum. I suppose that helped it get an award. (The award process does not take into account the underlying security of the debt instruments.)
Then, as soon as the news broke about this portion of the fund being in trouble, institutions withdrew their capital very quickly. 700 Million Rand left the first day, 500 million the next day. 40% of the fund, excluding the taxi portion, left the fund in a short space of time.
My investment guy wasn’t finished yet. We were half way through our very good wraps. He told me that the first bond instruments that would have been sold – to cover the withdrawals – would have been the quality stuff, (he means high quality debt) because that would have been the most tradeable, the easiest to sell, carrying the highest buyer demand. That has left the remaining 60% of the fund made up of not the best quality debt. And the ringfenced Taxi funds are still untouchable.
What is my point for writing about this today? I’m not sure. Maybe just a conversation around good custodianship of your money being far more than just an award or performance.