Absa group in a shocking decision move closed down Absa Money Market Fund (AMMF), worth around $5,623,236,000. But according to the Prudential Authority [PA], they had no concerns regarding the group’s decision after its long engagements with the bank since last year.
The bank’s official line is that its decision to close the fund was based on an independent review that found clients believed investments in the fund enjoyed the same safety guarantees as cash held in a bank account. This was partly due to the fund’s rather unusual integration into Absa’s banking system as it allowed investors to make withdrawals from the fund directly from ATMs not a typical feature of most unit trusts.
The South African Reserve Bank (SARB) said the Prudential Authority (PA) had a number of engagements with Absa Group (AGL) during the course of 2020 and 2021 on the proposed closure of the Absa Money Market Fund and rationale thereof.
“The closure of the Absa Money Market Fund was based on an assessment and decision made by the Absa Group. The PA does not have any material concerns regarding AGL’s decision to wind down the fund,” the SARB said.
Last week, Absa informed investors that it would close the unit trust fund, which had been operating since 1997 in terms of Section 102 of the Collective Investment Schemes Control Act, and it would be closed on July 6.
However, Anchor Capital said they were surprised by Absa Asset Management’s decision to close the money market fund.
Anchor chief investment officer Nolan Wapenaar said the removal of such a large participant in the short-term interbank funding market would have an impact and banks’ negotiable certificate of deposit (NCD) rates might drift higher as the competition to attract a smaller funding pool intensifies.
“This is one of the largest unit trusts in the country and has been doing reasonably well. We are not aware of how the fund was marketed to clients, though as Absa states there was a misperception among investors that the unit trust was guaranteed by Absa which was not that case,” Wapenaar said.
“That said, we do not think that the AMMF’s closure creates systemic risks, and we expect that the remaining money market funds and fixed income portfolios in the country will continue to function effectively.”
Last week, Absa Group spooked investors by giving them a 90 days ultimatum to withdraw their funds or engage their financial advisers should they wish to switch their funds to any of their other financial products. The bank said the funds would be transferred to Absa investment bank account.
Wapenaar said there was no one size-fits-all solution to investments as an option of an investment bank account at Absa, or a new money market fund, would not work for all investors.
“Therefore, we expect that many investors will have to take action to avoid a sub-optimal outcome,” he said.
According to Saleh Jamodien, a research and investment analyst at Glacier, says Absa’s decision may have sparked concern among clients about the invested money market funds across the industry.
“This should not necessarily be a cause for concern regarding the validity of a mandate which aims to maximize interest income and preserve capital. Absa has since cited the reason for closure as centered around the fact that the majority of their Absa bank clients believe that the capital within the AMMF and its associated returns are guaranteed by Absa Bank,” Jamodien said.
Clients have been left with more questions than answers about the fund’s closure, in an unprecedented move of winding down one of the biggest units trusts in SA, hence fueling rampant speculation that the bank is not being completely transparent with the public.