Barnard Jacobs Mellet Private Client Services (BJM PCS), wealth managers and advisers to some of South Africa's most affluent families, says recent sub-prime mortgage market debacles have reminded American investors of “the risk they all forgot”.
Unfortunately, many South Africans still neglect to ask a key question: ‘Who carries the credit risk when things go wrong?'
“The US credit crunch is focusing international attention on this blind-spot,” says Sunel Veldtman, a director of BJM PCS.
The wealth manager and investment consultant has direct representation in the USA as part of the BJM stock-broking group. It is therefore close to American concerns about under-informed investors who fail to check where underlying credit risk lies.
“I wish we could report that South Africans have greater awareness of credit risk,” says Veldtman. “Unfortunately, the issue is not investigated in nearly enough detail by investors.”
The subject is top of mind in the US following “dodgy debt packaging” by some financial product developers that fed strong demand for securitisation products.
So far, the most spectacular victim of poorly managed credit risk is the Wall Street-based Bear Stearns group - a company now being sold to JPMorgan Chase at $2 a share (its shares traded at $130 a year ago).
Veldtman explains: “The question is fundamental. Who carries the risk or accepts liability when positions have to be settled?
“In a constantly rising market, institutions and investors can play a game of ‘pass the parcel', moving risk to the next link in the chain, without anyone getting hurt. But when markets turn, the buck stops somewhere and ramifications can be severe.
“In our increasingly volatile market, all investors - especially vulnerable investor-savers - should be seeking greater clarity on credit risk.”
Greater consumer awareness is vital, and not only because of recent events.
“Some long-term trends also suggest that greater familiarity is needed with the practice of passing on risk,” says Veldtman.
“For example, companies now pass investment fund risk to their workers by moving from defined benefit pension funds to defined contribution funds that make investment returns a membership responsibility.
“Banks pass on interest rate risks through debt products whose repayments are governed by prevailing rather than fixed rates. Years ago, in an era of slow or miniscule rate movements, banks took these risks.”
Evidently, a game of pass-the-risk has been going on for some time without ordinary saver-investors being fully aware of their vulnerability should they become the final risk repository.
Veldtman adds: “An investor should always ask who carries the underlying risk in any transaction or within any investment product. However, some products are so complex the layman could still be at a huge disadvantage in any discussion of credit risk.
“It is probably best to seek advice from professionals linked to a reputable company known for a conservative stance on matters of risk.
“No one believes that credit crunch contagion from the US is imminent in South Africa, but a little more caution on credit risk will not go amiss.”
