EPaper

Coronation curbs churn for profit

Garth Theunissen

Coronation Fund Managers has taken action to curb frequent switching in and out of its offshore feeder funds, after it discovered that one of its portfolio managers was engaged in such activity to exploit pricing delays for his own gain.

Coronation Fund Managers has taken action to curb frequent switching in and out of its offshore feeder funds, after it discovered that one of its portfolio managers was engaged in such activity to exploit pricing delays for his own gain.

The Cape Town-headquartered asset manager detected unusually high levels of trading in three of its unit trusts by certain clients in December 2020, prompting a detailed review of all switching activity across its entire unit trust range over the three preceding calendar years.

The investigation identified five clients who had switched frequently in and out of three of its global equity unit trust feeder funds to exploit price inefficiencies between their local and offshore pricing.

While such activity is not illegal, Coronation’s investigation revealed that one of the individuals involved was portfolio manager Adrian Zetler, who resigned in January after a formal inquiry into the matter. Coronation says it took legal advice on the matter.

“Adrian defended his actions throughout the process because he did not breach any laws, regulations, unit trust rules or personal account trading rules. He also traded across many unit trusts, not just the ones with a pricing inefficiency, and acted transparently throughout by trading in his own name,” Coronation said in a statement.

“However, trading activity of this nature is clearly not consistent with Coronation’s longterm investment philosophy and ethos and he resigned from the company in January 2021, once he understood how the firm felt about his activities.”

While Zetler may have resigned in January, his LinkedIn profile shows his employment at Coronation terminating in April, after almost 12 years with the company. He is listed as working at A² Investment Partners since April.

The three funds that were exploited for pricing inefficiencies were Coronation’s global equity select feeder fund, the global opportunities equity feeder fund and the global managed feeder fund.

Feeder funds are randde-nominated unit trusts domiciled in SA that replicate the performance of their offshore master funds and allow local savers to contribute directly into them in rand rather than doing so in foreign currency, which can have exchange control implications.

Pricing delays between the offshore master funds and their local feeder fund counterparts occur because of the complexity of finalising closing prices across different time zones, currencies and varying market closing times.

“This complexity of pricing international unit trusts in SA is an industry-wide challenge,” said Coronation. “Although this inefficiency had not been an

issue in normal market conditions, it became an issue during the extraordinary daily volatility that we experienced as markets recovered from the Covid-19 collapse in 2020.”

Coronation’s SA-domiciled, rand-denominated feeder funds are priced using the previous day’s closing net asset value of their foreign currency master fund, which is standard industry practice in SA.

The firm’s offshore master funds, which are domiciled in Ireland, are priced using all country world prices at market close, meaning their final net asset values are only reflected in their rand-denominated feeder funds the next day from about 2pm SA time. Since the prices reflected in the local feeder funds lag those of the offshore markets on which they are based, astute market participants can exploit pricing delays by either acquiring or disposing of local feeder fund units based on what offshore markets are signalling.

As the offshore market movements are known a day ahead of prices being reflected in local feeder funds, traders can either buy or sell with a high probability of gains or losses.

“As unit trusts are long-term investment vehicles, Coronation is opposed to all instances of short-term trading in our unit trusts, despite it being perfectly lawful to do so,” the company said. “However, in respect of the trades in these three unit trusts, these five clients had profited from a pricing inefficiency, which is a more serious issue.”

Coronation has subsequently been forced to change the pricing mechanism of the affected funds and has notified the Financial Services Conduct Authority (FSCA). It has also informed clients engaged in such activity that it will levy switching fees on their future transactions if they persist with trades even though the activity is not illegal.

Though Coronation says the effect on the affected unit trusts was immaterial, it has compensated the funds with the equivalent of the full profit made by the clients who engaged in the trading, to restore them to the positions they would have been in had the trades not taken place. It has also imposed a threemonth minimum holding period on all employees who switch from one Coronation unit trust to another.

“We are very comfortable that throughout the process we acted professionally, quickly, and in clients’ best interests,” Coronation said.

“We obtained legal advice throughout the process to help us in discharging our legal and regulatory obligations.”

THIS COMPLEXITY OF PRICING INTERNATIONAL UNIT TRUSTS IN SA IS AN INDUSTRY-WIDE CHALLENGE

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2021-09-20T07:00:00.0000000Z

2021-09-20T07:00:00.0000000Z

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