Transparency vital in post-Madoff investing
Product transparency and counterparty risk are fast becoming crucial for investors as fallout from international fraud investigations create worldwide jitters; especially the Bernard Madoff case in which some investors have been surprised to find that parts of their portfolios were exposed to what is alleged to be the world’s biggest Ponzi scheme.
The fallout may even extend to South Africa and has made transparent structures without veiled feeder arrangements a key test.
“Investors should demand to know exactly what the underlying investments and exposures of products are, with the assurance that they can price it and realise value immediately if necessary,” says Kari van Rensburg, a Director at Sandton-based Deutsche Securities.
Deutsche Bank is one of the leaders in the marketing of Exchange Traded Funds (ETFs), the listed index-linked products that still attract large net inflows even as international markets tumble and investors become increasingly nervous following scandals like the Madoff case.
ETFs are passively managed investment funds that track the performance of an underlying index. High transparency is achieved through daily publication of index constituents while credit risk is minimised as ETFs are listed. They trade on the JSE like single stocks and can be bought and sold via a stockbroker, financial adviser or ETF provider. ETFs are significantly cheaper than actively managed funds and fund-of-funds structures and are regulated by the Financial Services Board.
Wall Street-based Madoff Securities recently collapsed. Investigators from the US Securities Exchange Commission (SEC) are now sifted the ‘debris’ for evidence of fraud, with $50 billion said to be missing.
The house of cards imploded when Madoff’s investors, concerned by the global tailspin in equity markets, tried to withdraw money only to find there was nothing left.
Bernard Madoff, former NASDAQ chairman and once the darling of Wall Street, is now on bail while enquiries continue into his alleged Ponzi scheme – a scam named after legendary con-man Charles Ponzi whereby investment returns are paid from earlier capital, fostering continuing inflows as above-average gains seem to be constantly achieved.
Madoff achieved such good results for so many years that many investment managers from numerous jurisdictions contributed funds through well accepted feeder arrangements between investment management firms.
Passing on an investor’s money to another party is often part of an investment manager’s diversification strategy. The trouble is that investors may have only a vague idea what the underlying investments and exposures are.
