What is an actively managed certificate?

An actively managed certificate (AMC) offers you the option to get exposure to a diversified fund managed by experienced investment professionals by buying a single security listed on a stock exchange.

An AMC is actually what is known as a structured product - it is an investment contract or debt instrument typically issued by a bank that offers you an investment return based on the return of the portfolio to which it is linked.

There is no fund into which you invest and you do not own a portion of the underlying instruments as you do in a unit trust or exchange traded fund (ETF). Instead you invest in a debt instrument issued by the bank or other issuer. The certificate obliges the issuer to deliver your investment with the performance of the linked portfolio, giving you effective exposure to the actively managed portfolio.

The AMC issuer in turn contracts with the portfolio manager to have the manager manage the portfolio. This means the fund manager actively selects shares, bonds or other securities for the portfolio and, in the case of multi-asset funds, will actively decide on the asset allocation of the portfolio. As is the case with an actively managed fund, the aim is likely to be to outperform a benchmark, which may be an index or a composite of indices.

The AMC issuer holds the assets, rebalances the portfolio in line with what the manager tells it, acts as market maker and calculates the portfolio’s performance.

As the issuer does not have to establish a fund, it is quicker and easier to launch an AMC, but there are also some risks for investors.

AMCs and exchange traded notes

In some ways, AMCs are similar to an exchange traded note (ETN) – they are both debt instruments listed on a stock exchange and offer exposure to an underlying portfolio. Read more: What is an exchange traded note?

However, while ETNs give you exposure to a passively managed index or  commodities, actively managed certificates offer exposure to actively managed portfolios.  

As is the case with an ETN, you need to be confident that the bank or other issuer that issues the AMC is good to repay your investment. This is known as credit issuer risk, which is a risk when investing in both AMCs and ETNs.

How are AMCs regulated in South Africa?

AMCs are relatively new in South Africa as the JSE only amended its Listing Requirements to allow for the listing of AMCs in October 2022.

AMCs listed on the JSE must:

Be issued by a bank regulated under the Banks Act or a foreign entity that is regulated under equivalent foreign legislation. The JSE checks this is the case before listing the AMC.

Be provided by a licensed financial services provider (FSP) regulated by the Financial Sector Conduct Authority (FSCA).

Be exposed to a portfolio managed by:

The holder of a category II discretionary FSP licence;

A member of the JSE authorised to manage discretionary funds; or

A foreign manager with equivalent status.

Comply with the JSE listing requirements and the Financial Markets Act.

While AMCs comply with JSE listing requirements, investors do not enjoy the protection afforded to unit trust and ETF investors under the Collective Investment Schemes Control Act (CISCA). CISCA regulates all unit trust funds that are domiciled in South Africa and which foreign-domiciled funds can be marketed here.

This means that South African AMCs, unlike unit trusts and ETFs:

Do not need to adhere to investment limits for the portfolio’s holdings in a single share, bond or other security or limits on size of a holding in single security.

Have the underlying investments or securities are not held by a custodian so you are not protected from any financial difficulties the issuer of the securities may experience.

SA AMCs are rand-based

AMCs listed on the JSE are listed, traded and settled or paid out in rands, even if the underlying exposure is to a portfolio of shares, bonds or other securities listed on a foreign exchange.

AMCs are regarded as "inward listed" foreign securities under South African exchange control rules.

This means that the underlying portfolio to which an AMC’s performance is linked can invest in foreign shares without any exchange control limits on the manager, issuer or the investor.

This means the manager is not constrained by exchange controls that limit how much of their total assets under management can be invested in offshore markets. South African exchange controls at times cause managers to close funds to new investments (a soft close).  AMCs do not have this problem.

It also means investors can enjoy exposure to the returns earned by foreign investment instruments without making use of any foreign allowance under the exchange control rules. Their investments, however, remain exposed to the rand.

How can I buy an AMC?

AMCs can be bought or sold on share trading platforms and are repriced throughout the day, unlike unit trusts which are priced at the end of the day only and can be bought or sold from the relevant unit trust company or through an investment platform (linked investment services provider (Lisp)).

You can buy an AMC from a stockbroker or online stockbroker. You will need to open a trading account and you can buy a JSE-listed AMC from any stockbroker registered as a member with the JSE.

When you want to sell an AMC, as is the case with unit trusts, ETFs and ETNs, you can sell it to the market maker (often also the issuer).

You may find your unit trust fund manager or discretionary investment fund manager using an AMC as an underlying investment in your fund.

What must be disclosed about an AMC? 

The issuer of an AMC must disclose:

The investment mandate and strategy of the linked portfolio including the asset classes and regions in which it will invest and any rules governing how assets are selected;

The identity, qualifications, and regulatory status of the portfolio manager;

The composition of the underlying assets in the portfolio;

The management fees, performance fees, and any other charges and how these impact the value of the certificate;

The investment, liquidity, credit and operational risks;

The credit risk of the issuer.

What types of AMCs are there?

AMCs can be invested in equity portfolios, fixed interest portfolios, listed property portfolios, multi-asset portfolios or hedge funds. AMCs portfolios can include alternatives such as physical property, private equity, and commodities, as well as digital assets such as cryptocurrencies.

Currently many South African AMCs are global equity funds.

What are the costs of AMCs?

AMCs, like shares, are bought and sold at the price at which they are listed on the stock exchange. The difference is what the market maker earns.

The issuer makes money from the way the AMC is structured and the fee is similar to the fee a unit trust management company earns.

The issuer of the AMC is required in terms of JSE listing requirements to disclose the total cost on its website or other freely available platform, but there is no regulated format for this disclosure.

AMC investors will also pay fees to open a stock broking account and fees for trading shares. 

What are the minimum investments?

When you invest in an AMC, your minimum investment amount will be determined by the stockbroker or online stockbroker you use. Some online stockbrokers have no minimum investment amounts.

In this way AMCs may offer you exposure to, for example, a stockbroker’s private client houseview portfolio or a niche boutique asset manager’s portfolio at lower minimums than you would be offered if you invested in the manager’s fund.

What are the investment risks?

When you invest in an AMC you should be aware of the risks.

• The credit risk

When you invest in an AMC you take the risk that the issuer will make good on the contract. As AMCs are issued by banks which are subject to stringent capital adequacy requirements, the risk is low (it is the same credit risk as having a savings account with that bank), but banks do fail from time to time.

You do not have a right to the underlying investments in the portfolio and these investments are not held separately for you by a custodian as is the case with a unit trust fund or an ETF that is a collective investment scheme.

• Market risk

There are no guarantees on the performance of an AMC – your investment could make or lose money. In addition, the actively managed portfolio to which your AMC is linked may outperform or underperform its benchmark if the fund manager makes the wrong call when selecting securities or when to buy or sell them, or it makes poorly timed allocations to different regions, industries or asset classes. This is the same risk as you have with any actively managed investment, such as an actively managed unit trust or actively managed ETF.

On the other hand, an AMC is more diversified than a single share and the manager may actively minimise the risk of market falls to which you are fully exposed when you invest in a single share or even an index in which securities are weighted according to their market capitalisation. As an investor, you need to consider the manager’s investment approach and its track record.

• Investment limits

As an AMC is not a collective investment, there are no rules on what the manager can invest in or to what extent as there are in unit trusts and ETFs.

An AMC portfolio may also be able to borrow to invest and hedge against a fall in the price of a security to a much greater extent than a unit trust fund.

What are the tax implications?

If you are a South African resident (for tax purposes) investing in AMCs will be taxed in the same way that investors in other securities - shares and bonds - are taxed.

Interest and dividends earned in the linked portfolio will increase its value and the value of the AMC.

When you sell your investment, you may be liable for capital gains tax (CGT) on any gains made – income tax is applied to taxable capital gains for the tax year above the annual capital gains tax exemption.

AMCs cannot be included directly in a tax-free savings account as these accounts do not include individual stockbroking accounts through which you can select your own shares. Your tax-free savings account investment in a unit trust, could, however be exposed to an AMC.

Foreign AMCs may be different

Remember that AMCs offered in countries other than South Africa may have different features and abide by different regulations. Be sure you are familiar with the risks before you invest.

Review the investment documents and if you are not entirely confident, get help from a professional financial advisor before you make any investment decisions.

This article was reviewed by Nerina Visser, director at ETFSA Portfolio Management Company and chairperson of the Association of Savings and Investments in South Africa ETF Standing Committee