Heystek on R12bn Income Fund exposed to R800m in taxi industry loss

One of the biggest enhanced income funds – the MI-Plan Enhanced Income Fund – has ringfenced about R800 million in assets. In this interview with BizNews, investment strategist Magnus Heystek explains why this portion of the R12-billion fund has been side-pocketed for further investigation – after a challenge with an investment directly linked to the taxi industry. He points out that the downturn in the economy, high interest rates, and high unemployment, have left many of the taxi operators unable or unwilling to repay their loans. Heystek gives his take on whether the money is actually lost and how long it could take to be recovered.

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Relevant timestamps from the interview

00:00 – Introduction
07:46 – How big is the MI plan?
09:13 – How much is in the side pocket?
10:26 – Fear for investors that the money is lost
11:07 – Money recovery
11:56 – The difference between money market and enhanced income funds
14:25 – No reason to change strategy to investing in an enhanced income funds
15:38 – Conclusion

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Highlights from the interview ___STEADY_PAYWALL___

The portion side-pocketed:

“…that is effectively being frozen and you cannot transact on it. You can’t withdraw it. But the money is still there.

“…that is about 8.6 % of the total value of the overall portfolio. So it’s a sizable amount of money in the fund, which is now in the side pocket, which now allows the fund managers and the promoters of that instrument to go and investigate.”

Where was that money invested?

“…that was invested into what they call two structured notes, directly and indirectly linked to the taxi industry in South Africa. In other words, they were financing the buying of new taxis and also the buying and selling of existing taxis in the marketplace.

“Now, as a consequence of the downturn in the economy, high interest rates, the high unemployment, many of the taxi operators have been unable or willing to repay the loans that they need to to the originators of these funds and hence the payment to the fund could not be made.”

Read more: Magnus Heystek: The JSE’s slow demise as Ramaphoria turns to Dysphoria

How can the money be recovered?

“Now the fund manager has told me about half of that is secured by the taxis themselves. They’re brand new, haven’t been sold yet…they park somewhere so they can go and take those taxis and sell them in the open market and get their money back. It’s the taxis that have been sold to individual taxi owners that are operating.

“So there’s a process that has to be followed to go and repossess those taxes and then resold or whatever the case might be.

“So that’s where the delay will come in. And it could take a year, take two years…One hopes it will be resolved in the next year or two.

“In the meantime, investors have lost no money. It’s in a side pocket when they get a statement from the investment company. It will say 8.5 % of your funds have been parked in the side pocket. It’s still an asset, but the balance of your fund is freely liquid; it’s freely tradable.”

Could the money be irretrievably lost?

“No, I really don’t think so. There might be some losses if some of these taxis have been wrecked and guys haven’t paid their insurance premiums, but this is all protected within the structures that it’s all done for you. There’s insurance taken out on the taxi. There’s a car tracker attached to a taxi. They actually know where every single taxi is in the country. That’s how it works.

“But if there are losses, and one hopes there won’t be losses, it will be minimal in the overall scheme of things. But it will take time before we have that answer…”

Will you change your enhanced income fund investment strategy now?

“No, absolutely not. We’ve made no changes. We’ve made no recommendations. We still will put money in. We’ll still be using other enhanced income funds. We have always diversified within the income fund space, which is a general investment principle.

“There are some guys trying to spread rumours about the fund, but there’s vested interest. They would like to get the funds into their management and we just tell people simply ignore that, stick with your fund as a percentage of your overall portfolio. It’s tiny. You made so much money on the offshore funds, you can absorb it quite easily.”