Old Mutual has informed investors that it intends to close two of its longest running unit trusts. The asset manager has proposed that both the Old Mutual Mining and Resources Fund, which was launched in 1987, and the Old Mutual Gold Fund, which opened in 1990, be amalgamated into the Old Mutual Equity Fund.
Siboniso Nxumalo, head of the Old Mutual Equities boutique, says the decision is part of a wider consolidation that has been taking place within the firm.
“What clients have told us is that we have too many products, and that it’s too confusing. The industry is too confusing,” Nxumalo explains. “When they come onto our website, they don’t know which are the best funds for them.”
Old Mutual has therefore slimmed down its offering. Earlier this year, the asset manager received approval to close five other funds – 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. These were also all merged into the Old Mutual Equity Fund.
This is part of an industry-wide trend among many larger managers who are seeing a meaningful fall in demand for sector-specific funds in particular.
“In the past, clients would use sector funds, like the Gold Fund or the Mining and Resources Fund as building blocks to create their own versions of balanced funds,” Nxumalo explains.
“But over the last 10 years, across the industry, sector funds have been experiencing outflows. Our experience has been no different.”
According to information from the Association for Savings and Investment South Africa (Asisa), there was R5.65 billion invested in resources funds at the end of 2009. That had fallen to R3.95 billion by the end of June this year.
As Nxumalo points out, the importance of the resources sector on the JSE has also diminished substantially since these funds were started.
“If you go back to when we launched these funds, mining and commodities in general constituted a massive part of the JSE All Share Index,” he says. “But as time has gone by, their contribution has shrunk. In the 1980s, there were 50 listed gold companies on the JSE. Now there are six. So, over time, the relevance of these funds has faded.”
Nxumalo believes there will therefore be benefits to clients by closing these products.
“There is a cost attached to having a lot of products,” he says.
“There are a lot of back-office costs in running these funds, and ultimately it is the client that pays for that. So if we simplify our offering, we not only make it easier for clients to understand what we do, we also make it cheaper over time, which means we can add more value.”
The team at Old Mutual Equities, which will remain fully intact, will now be looking after just three funds instead of 10. Nxumalo hopes this improved focus will also lead to better outcomes.
Not all investors are, however, enamoured with Old Mutual’s decision – particularly because the recent performance of these two funds has been outstanding.
According to figures from Morningstar, the Old Mutual Gold Fund has gained 111% over the past 12 months.
This makes it comfortably the top performing unit trust in South Africa for this period. The next highest return is 31%.
Financial advisor David Melvill, a long time gold bull, is particularly concerned that investors in this fund who have patiently sat through years of underperformance are now being denied the opportunity to receive these higher returns.
“Some of our clients have been loyal supporters of this fund for 20 years,” Melvill points out. “In these floundering times, gold is the perfect uncorrelated asset.”
Nxumalo, however, sees matters differently.
“I think this is actually the best time to close the fund,” he says. “Clients have gotten a lot of value from it, especially over the last six or seven months. And if we look at the historical performance of this fund, whenever it has delivered the kind of performance it has over the last few months, it generally sets it up for disappointing performance over the next 12 months because of the volatile nature of gold shares.”
While there may be informed investors who understand the risks of these products, Old Mutual’s experience is that they can be a trap for performance chasers.
“One of the big dangers we have witnessed in managing these funds over time is that they can lead to mis-selling,” Nxumalo says. “Advisors see strong recent performance and they put clients who should never be in such risky funds into it at the wrong time, at the top of the cycle.
“We understand that there are some people who love these products, especially now, but we have to be a lot more prudent in the products that we provide to clients.”
Investors in the funds are currently being asked to vote on the proposed closures.