Issue: March/May 09
Umbono Fund Managers

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
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.


  • Balanced fund blends

    A good example of a portfolio that uses an active/tracker combination is a global or domestic balanced fund. Here, the fund’s asset class weightings are managed according to an active ‘best investment view’ whilst using low-cost multi-asset class tracker building blocks.

  • Specialist equity blends

    For example, by blending a growth-style active manager with a value-orientated tracker (eg, the FTSE/JSE RAFI index fund), we create an overall equity portfolio with lower costs and lower risk. This active/tracker model can be specialised, taking into account the client’s risk aversion level, excess return requirements and time horizon.

  • Specialist bond blends

    Typically, the GOVI index contributes 80% to the modified duration of an actively managed bond portfolio. It therefore makes sense to combine a GOVI tracker (at 75% lower fees) with an actively managed bond fund that excludes GOVI bonds and rather focuses on adding excess returns via credit analysis.

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

  • lower overall costs;
  • lower overall risk, and
  • very similar excess-return potential.

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 He’ll be happy to help.