Hindsight is an exact science, but...

People who invested in Absa's money market fund thought they were putting cash into a safe, low-risk investment.

 But it turned out that the fund was exposed to African Bank. Business Times puts Absa CEO of wealth, investments and insurance, Willie Lategan, on the spot

BT: People believed their money-market investments were secure, and not exposed to the collapse of a single company. How did this happen?

WL: The money market fund did not have exposure to the shares or preference shares of African Bank (Abil). But we did invest in deposits and fixed-interest instruments issued by African Bank.

BT: How much did investors lose?

WL: On August 10, the fund was R53-billion in size, and 3% of the deposits were exposed to Abil. Bondholders took a 10% haircut, so the impact on the overall fund was 0.3%. This is the first time this has happened with money market funds. It is a disappointment to us, and it required us to take action to restore confidence.

BT: How did you restore confidence?

WL: We had to ensure that all investors in the fund, from the retail investors to institutions, were treated equally ... we also removed all the residual exposure to Abil from the fund on Friday August 15, which ensured we could get the fund rerated by Fitch and its rating restored.

BT: What happened to these investments if they've been stripped out of the fund?

WL: A transaction was done between Absa Bank and the fund, which is managed by Absa Asset Management, for the bank to take those instruments. So it is the bank that now carries the risk.

BT: Surely this means Absa shareholders are now burdened with those bad investments?

WL: The transaction was done on an arms-length basis, and followed the required governance processes in the fund ... Absa is one of the banks underwriting the [bailout] of the "good bank".

BT: Why were you so exposed to such a fragile bank? Did processes fail?

WL: No, our processes did not fail. We followed the fund's mandate. Hindsight can be an exact science, and putting ourselves back a few months, if we could have foreseen this ... But Abil's instruments were at the right level - investment grade, rated F1 or higher - so it did meet our mandate and criteria.

BT: Surely you must have seen the warnings about unsecured lending? Why did Absa's fund have exposure to such huge bad debts?

WL: I can't comment as I'm not the investment manager, so it's wrong for me to make assumptions about those decisions. There is an investment process, and we looked at whether the underlying instruments were rated or not.

BT: What impact will this have on money market funds in future?

WL: Our fund is 17 years old, and this is the first event of this nature we've ever seen in South Africa, so it's significant. After the financial crisis, we've seen significant developments [in regulation] in how money market funds operate in Western Europe and developed markets. We've had discussions with Treasury about how we do this here, so I expect those reforms to be accelerated.