The Old Mutual Investment Group has decided against shutting the Old Mutual Gold Fund. The unit trust, which has been around since 1990 and is the only remaining pure gold equity fund in the country, was slated to be merged into the Old Mutual Equity Fund from the start of November. A last-minute decision has however been made to keep it open.
Elize Botha, MD of Old Mutual Unit Trusts, says they were concerned about the number of clients who wanted to stay invested. They therefore elected to continue giving them that option.
As with the closure of any unit trust, Old Mutual had to seek the consent of investors through a voting process. This is however largely a formality as few investors respond to the ballot, and the legislation considers anyone who doesn’t vote as being in favour. In this instance, however, the sentiment from investors was unusually strongly opposed.
“If you look at ballots across the industry, only 8% to 20% of people vote,” Botha notes. “This ballot was in that region, but the number of people who voted against the proposal was higher than we’ve seen in the past.”
This means that, technically, the decision to close the fund was carried. However, after discussions with the Financial Sector Conduct Authority (FSCA), Old Mutual decided to withdraw its application for the closure, since so many of those who did vote were against the proposal.
“We always try to put clients at the epicentre of our thinking and with that in mind we decided to ask the FSCA to revoke our request to merge,” says Botha. “We wanted to take clients’ opinions into consideration, looking at the number who voted against.”
Much of the sentiment expressed against the fund’s closure had to do with its recent performance. The Old Mutual Gold Fund has returned over 80% in the past 12 months, making it easily the best-performing unit trust in South Africa.
This short-term strength is however massively overshadowed by its longer-term weakness. Over 10 years, the fund’s annualised return is 2.8% – the fourth-worst performance of any local unit trust.
“In a sense, which is probably contrary to investing wisdom, it would have been easier to close the fund in a year where the gold price was really low and the fund performance was poor,” says Meryl Pick, the fund’s portfolio manager.
“People look at it now as ‘hot’ – it’s on a winning wicket, so why would we want to shut that down?
“But our concern is that the performance you have seen over the past 12 months is the kind of performance you see once every 10 years or so,” she adds.
“As a long-term holder in the fund you do not actually do that well compared to some of our general equity funds.”
The fund is also extremely volatile. While its recent strength has been sharp and spectacular, it can also go the other way. In the last five months of 2016, it experienced a draw-down of 63%, as the chart below from Morningstar illustrates.
“One of the things we’ve decided as a company is that we do listen to clients,” says Botha. “But the fund is volatile and obviously that is the reality we will need to communicate very clearly to investors who stay behind.”
Botha says the decision to keep the fund open will not be reviewed again.
However, Siboniso Nxumalo, head of the Old Mutual Equities boutique, says it is likely that natural attrition will eventually take its toll.
“The reason why we were looking at closing our sector funds is that all of them have structurally had outflows over the last 10 years,” he points out. “If you model this fund over the next 10 years, unless something miraculous happens to gold, the fund by its nature will probably cease to exist.”