SIM: How safe is your collective investment scheme?
In light of the latest scandal to hit the global financial industry, the alleged $50bn hedge fund defrauded by Bernard Madoff in the US, investors may be wondering how safe their money really is. Candice Paine (pictured), Head of Retail at Sanlam Investment Management (SIM) reassures investors that consumer protection is of utmost importance in the South African Collective Investment Schemes (CIS) industry, with structures and gatekeepers firmly in place, as well as vigilant media and financial professionals who act as watchdogs to the industry.
The litany of disasters, from simple poor investment management to outright fraud, seems to keep growing with 100-year-old institutions failing, others begging for bail outs and rating agencies failing to rate correctly. South Africa is not immune, as evidenced by the current case against J Arthur Brown, former head of Fidentia.
“What most investors tend to do is concentrate their efforts on looking at investment risk, costs, relative performance, asset class exposure, mandates, objectives and the like. Very few questions are asked about the governance of CIS and consequently how safe their money is from fraud,” says Paine.
“By way of explanation, CIS are governed by the Collective Investment Schemes Control Act (CISCA) which regulates, amongst other things, how funds are managed, what securities can be held in the fund and who can act as trustees. The Financial Services Board polices CISCA and also approves the trustees. All assets in a CIS are held separately from the investment manager or the management company’s assets, and are instead held by the trustee of the CIS,” she explains.
“The trustee is licensed under CISCA, appointed by the management company, and regulated by CISCA and the Financial Institutions Act (Protection of Funds). It is the trustee’s responsibility to ensure that the CIS is run in compliance with CISCA. The trustee is the custodian of the assets of the CIS.”
The management company appoints an investment manager, regulated under the FAIS Act and the Financial Institutions (Protection of Funds) Act, to manage the assets of the CIS in accordance with a detailed investment mandate.
“In addition, both the management company and the investment manager are required by law to monitor compliance with the founding document and the investment mandate of the CIS and its various portfolios, and to highlight any discrepancies to the trustee as well as the portfolio manager so the portfolio can be brought back in line,” Paine says.
The manager is also obliged to send investors a quarterly report and an annual report listing all the assets in the portfolio in which they are invested.
Paine also reassures investors that the local financial press acts as a watchdog of sorts through its constant coverage of issues like performance and fees. And, because of widespread use of CIS for institutional investments, there are myriads of analysts and other financial professionals constantly carrying out very detailed due diligences on these funds which cover not only investment process but also regulatory adherence and compliance.
“This comprehensive list of gatekeepers should give investors reassurance that consumer protection is of primary concern in the CIS industry,” says Paine.
The Collective Investment Scheme (CIS) industry in South Africa has grown exponentially since the move from defined benefit to defined contribution pension schemes. But not only those saving for retirement use these vehicles - they have also allowed fairly small investors to participate in the growth of capital markets in the past years.
“Collective Investment Schemes are available at a reasonable cost and cover a host of investment strategies. Their ease of use and accessibility has also seen an increase in the financial sophistication of the population as people are forced to take control of their financial future. The biggest challenge for investors now should be which fund to choose,” she concludes.
