Audit of asset manager merger safeguards investors

One of the largest mergers in the history of the South African asset management industry has been audited and independently verified as having been carried out cost effectively and with a minimal impact on investment performance.

The merger of RMB Asset Management (RMBAM) and Metropolitan Asset Managers (MetAm) into a single asset management entity, Momentum Investments, took place late last year as part of the merger between Momentum and Metropolitan. The R200 billion merger of the asset management businesses was carried out by RMB Morgan Stanley, and the relevant transactions audited by RisCura Transition, the independent risk management and analytics provider. The audit was finalised at the end of January.

Momentum Investments houses all the investments-related businesses of MMI Holdings, including asset management, alternative investments, collective investments, property investments and global investments.

“The reason for the audit was to give investors comfort that the merger was done effectively, with minimum impact on investment performance,” says Jacobus Troveri, head of RisCura Transition.

“This is regarded as best practice in South Africa, and was particularly important given the relationship between RMB Morgan Stanley and RMB Asset Management. An audit by an independent, third party like RisCura reassures investors that any conflict of interest issues were managed,” says Troveri. “The magnitude of the trade also required an external check being put in place.”

Such audits are mandatory in many global markets, and are rapidly becoming the norm in South Africa. In addition to mergers, they should be carried out when any structural change occurs to a pool of assets, Troveri says. This includes when a retirement fund transitions from a defined benefit to a defined contribution structure, when a fund changes its asset manager or its asset allocation, or when its assets are rebalanced.

At the heart of transition audits is detailed transaction cost analysis (TCA), an integral component of the trade process. TCA is critical for achieving best execution, controlling trading costs and bringing greater efficiencies to trading operations while empowering investors, asset managers and brokers to understand what the actual cost is of effecting transactions.

“Transition audits give investors an external, independent analysis of the success and costs incurred during a transition,” says Troveri. This is done by rigorously examining transaction costs, prices and market dynamics. This analysis is then compared to standard market practices to provide insight on the norms. “A transition audit can protect investors’ interests and ensure they get the best value from a transition. Similarly the regular analysis of transaction costs within a portfolio ensure that potential slippage can be monitored and decisive action be taken if required.”

Two of the larger names in global transition management – the Bank of New York Mellon and State Street Global Markets - were featured in the international media last year for instances of questionable billing practices. It was suggested that they fraudulently charged clients excessive and unwarranted fees without disclosure, which ultimately cost the funds significant value.

“These incidents highlight the need for, and potential value of, comprehensive audits on transitions and daily transactions.”