The Rise of Actively Managed Certificates (AMCs)

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A Game-Changer for Investors and Portfolio Managers Alike

In an ever-evolving financial landscape, innovation frequently finds its way to the forefront, pushing boundaries and redefining traditional investment strategies. A prime exemplar of such a transformation is the rise of Actively Managed Certificates (AMCs) both globally and locally.

Introduced to the Johannesburg Stock Exchange’s listings in July 2022, AMCs have since flourished with a market capitalisation of R8.5 billion as of 18 August 2023. A total of 32 AMCs have found their place in the market, showcasing the rapid adoption and trust they’ve garnered.

AMCs offer investors a chance to dip their toes into a diversified portfolio of underlying assets. Unlike traditional listed funds, investors aren’t buying physical assets; AMCs provide synthetic exposure, which means that they replicate the economic benefits of owning the actual assets without physical ownership. AMCs are issued by banks where the underlying referenced portfolio is managed by independent third-party experts and backed by robust regulatory frameworks. AMCs ensure that investment strategies are not just about returns, but also about safeguarding investor interests.

For discerning investors, AMCs emerge as an avant-garde solution, particularly when seeking avenues for offshore access. Historically, many issuers have opted to register funds in offshore markets, a process that often comes with the daunting prerequisite of possessing a substantial asset base, which not only acts as a barrier for smaller issuers but can sometimes slow the pace of entry. AMCs, in contrast, provide a streamlined gateway, enabling investors to bypass the cumbersome and asset-heavy offshore registration, rendering them particularly germane for those eager to expand their horizons without the associated bureaucratic weight.

Moreover, the allure of AMCs isn’t merely confined to accessibility.

Rather than re-inventing the wheel, third-party portfolio managers can deftly leverage the existing banking infrastructure, which includes pivotal components such as custody services and advanced trading infrastructure, thus mitigating the otherwise high operational costs and, by extension, enhancing the potential returns for investors. And, if the economic fabric were a ticking clock, AMCs, with their listed nature, would be its precise second hand.

They facilitate intraday trading, a feature indispensable for those who thrive on market fluctuations. A regulatory requirement includes that liquidity providers facilitate intraday liquidity and that AMC issuers ensure the daily publication of an intraday reference portfolio value (iRPV) on their websites, thereby offering greater visibility of the referenced portfolio’s value. Furthermore, their T+3 settlement system ensures that security transactions culminate within a succinct three-day cycle, bringing efficiency to the fore.

The global AMC trend hasn’t gone unnoticed by major players.

UBS Group AG’s recent foray, with five new AMCs listed on the JSE in April 2023, speaks volumes about the direction in which the industry is heading. These portfolios, encompassing the likes of the SAAM Local Growth Portfolio and the Mergence Global Quant Equity Portfolio, aim to deliver real returns through a focused investment in high-quality growth stocks.

Yet, the attraction isn’t solely for financial giants. The AMC arena has witnessed a surge of local boutique portfolio managers. Firms such as BP Bernstein, NVest, and Mergence Investment Managers, to name just a few, are exploring the vast potential of AMCs, bringing with them a mix of local expertise and innovative strategies.

The JSE, recognising the potential of AMCs, has embarked on a journey of regulatory rejuvenation.

Proposed amendments – including alterations to Section 19 (Specialist Securities), the introduction of a new BEE section, and consequential adjustments to Section 18 (Dual Listings) – aim to streamline the listing process, eliminate ambiguities, and align with international best practices. A notable change on the horizon concerns the use of derivatives in the AMC referenced portfolio. This suggests a broader spectrum of portfolios may soon come under the AMC umbrella, further widening opportunities for both investors, issuers and portfolio managers.

In an age where financial agility is paramount, AMCs offer a blend of flexibility, diversification, and strategic expertise. They represent not just another investment option, but a paradigm shift in how we perceive and engage with financial markets.