• ETF Enthusiast

What the fund? - Survivorship, fund amalgamation and confusion

Updated: Jun 15, 2019

The starting point for all investors is a financial plan, this serves as the guiding map on their journey with their money and details their approach to investing their money for the future. Despite my thoughts on them being clear, many people make use of unit trusts as a part of their financial plan. Some of the reasons for this are that unit trusts are an easy way to provide the investor with exposure to shares, which over the long term is a necessity in any financial portfolio. It also means that you do not have to worry about managing the investment yourself, many people (including myself at one point) are scared or feel that they know too little about investing to do this.

Imagine you go through the process of examining and comparing the many unit trust options offered by fund managers in the South African market. You talk to a financial adviser, you talk to friends and colleagues and you eventually decide on investing your money into a unit trust of a fancy looking company that you’ve seen on TV.

As a diligent investor you understand that you can’t make any rash decisions based on over or underperformance in the markets. So even when the unit trust has underperformed its benchmark over a two year period of being invested, you still feel more time needs to be given to the unit trust as markets should be measured over a long-term period.

Now imagine going through this thought process only to have this decision made for you. The fund manager has decided to discontinue your chosen unit trust fund, and rather send your money to another fund that they manage, perhaps one that didn’t have such a terrible performance over the last two years.

In June 2018 I published a blog post talking about simplicity in investing, and in that article I highlighted Old Mutual’s offering of around 40 in-house unit trust funds as complicated and overwhelming. It has been almost a year since this article and I decided to once again have a look at the list of unit trusts to see if the offering has changed at all.

Looking at the list it seems that Old Mutual has decided to discontinue 5 of its unit trust funds since my article was first published. This speaks to the rate of survivorship of South African equity funds where only around 60% of them still remain after a 5 year period.[1]

Old Mutual unit trusts no longer offered after my blog post in June 2018

Global Bond Feeder Fund

Global Emerging Market Fund

High Yield Opportunity Fund

Premium Equity Fund (Institutional)

RAFI® 40 Index Fund

But there could be some positives to this right? Maybe Old Mutual is finally trimming down this list to make their offering much more focused and simple for their customers? This would be great! Except during this time they also decided to add 5 more funds to their list since my article was first published nearly a year ago.

New Old Mutual unit trusts offered after my blog post in June 2018

MSCI Emerging Markets ESG Index Feeder Fund

MSCI World ESG Index Feeder Fund

RAFI® 40 Index Fund

Titan Global Equity Feeder Fund

Top 20 Fund

It’s true that a few of these are unit trusts which at their core are investing in index tracking products, however when diving deeper into these funds you find that they have built many corporate layers into these products and are therefore complete rip-offs if compared to any index funds available to the average investor on the JSE.

In a recent statement[2] Old Mutual describes that they are making even further moves to discontinue some of their unit trust funds. By the 31st of May 2019, they are looking to amalgamate the following funds into their “Old Mutual Equity Fund”:

· Old Mutual Financial Services Fund

· Old Mutual Industrial Fund

· Old Mutual Growth Fund

· Old Mutual Top Companies Fund

· Old Mutual Top 20 Fund

According to them their intent is for simplicity: “as part of our strategic intent to make it easier for our clients to invest with us and to create a clear, concise and consistent fund range, we made a proposal to the FSCA to amalgamate the following portfolios into Old Mutual Equity Fund”.

Simplicity is great, but discontinuing a fund that was only adding in the last year (Top20 fund) is scary, and most importantly I expect no more additions to this long list of funds in the near future.

Fund amalgamation is confusing for investors, it disrupts an investors strategy and can leave them with more questions than answers. Quite frankly the rate of survivorship in the South African unit trust market is embarrassing. For an industry which is supposed to have high degrees of long-termism, there is an awful lot of noise and change happening on a short-term basis. Not only do funds come and go at the speed of light but the benchmarks that the funds are compared to change too, and who knows how often the fund management team is changing on top of all of that. Discontinuing funds due to underperformance is also rather sneaky and dishonest business (I am not attributing this point to Old Mutual but to the action of fund amalgamation in general). If your actions as a fund manager lead to poor investment performance for your client then you should be required to own that performance, at least until you can get it right, instead of tucking it under the mattress and hoping that no one finds it anymore.

In my opinion it isn’t worth being a part of this complexity. Don’t let a business mess you around and throw-off your long-term strategy. Rather invest in the index and benchmark which most fund managers can’t beat through an exchange traded fund.

[1] The 2018 SPIVA report shows the survivorship rate of South African Equity unit trust funds over a one, three and five year period – https://drive.google.com/open?id=1vffdRm5MGuKTMMGereTevC5ltfDv78lI

[2] Amalgamation of the Old Mutual Financial Services Fund, Old Mutual Industrial Fund, Old Mutual Growth Fund, Old Mutual Top Companies Fund and the Old Mutual Top 20 Fund into the Old Mutual Equity Fund – https://www.oldmutual.co.za/docs/default-source/unit-trust/adviser-info-hub/communications/important_unit_trusts_fund_information_032019.pdf?sfvrsn=2

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