MMI’s Met Collective Investments this week nailed its colours to boutique active managers, launching a list of “premium partners” that will offer their white-label unit trust funds on its licence.
Meanwhile, investors in a number of white-label unit trust funds on Met’s (formerly Metropolitan’s) collective investment scheme licence are being balloted about moving to a collective investment scheme within the Efficient Group.
Kevin Hinton, the head of distribution and client services at MMI – which now includes Met Collective Investments – says the global investment market is being split between providers of cheap index-tracking investments and boutique active managers. Met is backing the latter and is listing certain boutique managers that operate on its licence as its partners. It will assist in making these managers available to you, the investor, by listing them on the platforms of linked-investment services providers.
Hinton says the asset managers listed as premium partners have been subject to a due diligence by Momentum Manager of Managers, the entity that selects managers for retirement funds offered by the MMI group. Some of these managers are already available to individual investors through Met Collective Investments.
In addition, asset managers that until now have been managing only retirement fund money will also be listed as premium partners as soon as they obtain approval from the Financial Services Board (FSB) to launch unit trust funds. Among these managers are Perpetua, the boutique manager launched by former Allan Gray manager Delphine Govender.
Met Collective Investments also offers its own collective investments, four of which are managed by or invested in other boutique managers, and Momentum Collective Investments has its own funds that are managed by Momentum Asset Managers.
Met Collective Investments will continue to support other white-label funds that use its licence, such as those of Cannon Asset Management, Sasfin, whose South Africa general equity fund won a Raging Bull Award in 2012, and Mazi Capital, the manager whose general equity fund won a Raging Bull Award this year.
Hinton says the funds that have terminated their contract to use Metropolitan’s unit trust licence are largely broker funds, and a number of them are moving to the Efficient Group’s collective investment scheme. Typically, financial advisers manage broker funds as funds of funds that invest in the underlying funds of well-known managers.
The FSB has had concerns about broker funds, and in 2011 it published a notice under the Collective Investment Schemes Control Act (Cisca) forcing companies that hold a unit trust licence to take responsibility for the white-label manager’s compliance with Cisca and for the licence-holder to put its name on the fund.
Last year, the FSB put out a circular stating that financial advisers are obliged to disclose to you both the fees they earn for financial advice and all the fees they earn for managing a white-label fund, including any rebates or kickbacks paid to them by the unit trust scheme manager.
Efficient Group boutique
Robert Walton, the former chief executive of Metropolitan Collective Investments, has launched Boutique Investment Partners within the Efficient Group, and the funds will move to a scheme within this entity.
Kedibone Dikokwe, the head of the collective investment schemes department of the FSB, says, in terms of the Cisca, funds that move from one collective investment scheme to another must ballot investors, because there is a change to the supplemental deed and the fund has to change its name to reflect the name of the licence-holder. (A supplemental deed complements a trust deed and, together, the trust deed and the supplemental deed establish and govern a fund.)
Dikokwe says new funds will be opened on the Efficient Group’s licence, and the funds offered by Met Collective Investments will amalgamate with the funds offered by the Efficient Group.
Hinton says research in the United States has identified that 50 percent of asset managers there are following the benchmark closely, while active asset managers with less than 10 funds are getting a higher proportion of mutual (unit trust) fund inflows than managers with more than 10 funds. This is also true, to some extent, for South African funds, he says.
As a result of their small size, boutique fund managers have a much bigger universe of shares in which to invest. They do not follow the benchmark closely – they often refer to themselves as benchmark agnostic – and can out-perform by investing in mid-cap or small-cap stocks, he says.
In this country, boutique managers with funds in the South African general equity sub-category out-performed larger managers between 2008 and 2011, Hinton says.
Performance fees
Many boutique fund managers charge performance fees, which at times can be very high. For example, among Metropolitan’s premium partners is 36One, which has a total expense ratio (TER) of five percent on its Flexible Opportunity Fund for the year to the end of March. TER takes into account the asset management fees, performance fees, custodian and trustee fees, trading costs and audit fees.
Cy Jacobs, the co-founder and head of investment at 36One, says the high TER is a reflection of the fund’s performance fees, which are currently high, because the fund has out-performed its benchmark significantly. 36One takes 12.5 percent of the out-performance of the repo rate (currently, 5.5 percent), plus two percent, over rolling two-year periods.
The Flexible Opportunity Fund, which is not restricted in the asset classes in which it can invest, has almost 70 percent of its assets in equities, where average returns, as reflected by the FTSE/JSE All Share Index, have been 21.98 percent a year over the past five years. The fund returned 28.58 percent a year over the five years to the end of March, and 21.15 percent over the year.
David O’Leary, the director of manager research at Morningstar, says performance fees are far more ubiquitous in South Africa than in other countries, and he questioned the need for managers to be paid these fees.
He says the fees are often asymmetrical: they are high when performance is good, but when it is not, the performance fee isn’t always clawed back – and the devil is in the detail when determining how these fees are calculated.
Performance fees are intended to provide incentives to managers to out-perform a particular benchmark or “hurdle”.
Unfortunately, performance fees can also act as an incentive for managers to take more risk than they should in order to earn a performance fee, or not to take what would be regarded as appropriate risk to prevent the fee from being compromised, O’Leary says.