This month, Veritas Wealth turned 10. It’s certainly been a decade that brings to mind the phrase coined by Benjamin Franklin: nothing is for certain except death and taxes! Fortunately, we’ve had a great run, in spite of two ground-shaking events: the fall of Lehman Brothers in 2008, and a fire in our office in 2013. In retrospect, we think our success is due in part to how we balance the knowns with the unknowns, and just as important, how we communicate both to our clients.
Two weeks ago, South Africa and the investment world observed another unknown. While the troubles at African Bank (ABIL) were not unknown, the speed at which ABIL collapsed and the consequences this has had on money market funds were.
How has African Bank affected money markets?
African Bank did not have many depositors, so it used to issue corporate bonds in order to raise money to lend to people for consumer purchases. Nearly all asset managers bought African Bank bonds as they gave a high yield, which in turn gave the investor higher yields.
Some money markets were not affected at all. Others have had to reduce the amount of interest, dropping it from around 5,7% to 4,8% a few days later. Investec has dropped interest to 1% initially and has now recovered back to just over 6%. ABSA has taken a little bit of capital out of clients’ accounts and kept the interest rate at 5,85%. Nedgroup and a number of other firms have created a side pocket. This means they have moved the ABIL holding (6% of fund) into another fund and they will wait for the bonds to mature and then put the capital back in the fund. The remaining 94% will continue to get the full interest and be fully liquid. This position will unwind after a few months.
Veritas has always been quite disciplined about explaining risks to clients before we invest their money. We give people a sense of what would happen to their investments if one day another Lehmans collapse happens, and what kind of losses they would incur in the short term. This is called setting client expectations upfront, and unfortunately, not all financial advisors do it.
Often when we are explaining risk and how portfolios are constructed to clients, we refer to money market funds as risk free, and since 2008, we have added a caveat, which is: “unless of course Lehman Brothers goes down and then your capital may be at risk.” We have to say it; it would be irresponsible not to.
What have we learnt over the past decade?
1. There is no such thing as 100% risk-free.
2. The best way to deal with the unknown is to admit that it exists. Being open and honest with clients about this is what has helped us grow our own company. We like to assume that we don’t know what is about to happen, and the best way to deal with the unknowns is to diversify portfolios. Diversity and time are the two ingredients which will best protect our clients in the long term.
Thank you all for your support and trust over the past decade and here’s to the future and all its unknowns!