Issue: March/May 09
Get your fund’s fees down
Consider the merits of active/tracker blending. Umbono Fund Managers deputy MD Craig Chambers explains its cost advantages.
Particularly in these days of lower returns, fees paid for investment products become increasingly important. Umbono research shows that SA pension funds are needlessly paying too much on at least a third of their equity portfolios. The reason is that:
Chambers... big savings
Unavoidably, active portfolios have a passive core
The SA market has debilitating investment constraints. When constructing portfolios, these constraints make it difficult for large investors using several active managers to avoid a passive core. This is because, according to Umbono research, as much as 96% of an active equity manager’s portfolio typically comprises only 80 stocks.
Tracking error (TE) is a statistical measure. It shows the difference in a fund’s share weights relative to the benchmark’s weights; the higher the TE, the bigger the difference. An actively managed fund will have a TE of 5% or higher; a 0,50% TE fund would be a full-replication index fund, being almost identical to the index it tracks.
In SA, one third of a typical active portfolio will have a TE of less than 0,50% relative to the FTSE/JSE SWIX index. In effect, it means that this one-third portion is passive.
The performance of active funds also supports this research. Aggregated active manager returns net of fees have shown no consistent outperformance of the SWIX index since its launch seven years ago.
As a result, investors in active-only portfolios are paying (higher) active fees for a third of their portfolios which effectively perform as a passive core. This core should attract much lower costs.
ACTIVE/TRACKER BLENDS ARE COMMON SENSE
Our objective at Umbono Fund Managers is to ensure that, relative to its original active-only blend, a portfolio with a new active/tracker blend has
Should your fund be interested in Umbono conducting a blending analysis to determine the optimal blend of your current active funds plus a tracker component, please contact Craig Chambers on tel (011) 562-6039 or email firstname.lastname@example.org. He’ll be happy to help.