Edition: Dec 2014 - Feb 2015


Umbrella fund idealism

Field . . . thoughts on Gluckman

As active members of the industry and vocal proponents of industry reform, we read the advertorial "Crunch for umbrella funds" (TT Sept-Nov) with enthusiasm. We certainly agree with many of the points raised by Sanlam Employee Benefits special projects head David Gluckman, such as the need to re-look the changing role of the trustee versus the sponsor, and agree that change is needed to create a more open market and increase competitiveness.

However, Gluckman’s view that the umbrella-fund market requires a completely new administrative framework is too idealistic. While it may seem like driving retirement reform, issues of practicality cannot be ignored when trying to implement step changes in an industry of this nature. As is so often the case, implementing gradual change is often more successful, especially if it’s going to take 15 years for a complete overhaul.

The industry regulator has thus far opted for this gradual approach, and has made some headway in addressing many of the issues that are symptomatic of the larger underlying problem. It relates to poor fund administration and bureaucratic red tape.

For instance, the Financial Services Board has done good work in trying to root out some of the administrative inefficiency – that makes it so difficult for customers to switch funds – by removing smaller administrators that aren't competent and by bringing in capital adequacy. Once implemented, market consolidation should be better realised.

However, despite regulation, a great deal of inertia remains when customers try to switch funds. The current model is still too reliant on the previous fund administrator to transfer the required data to the new administrator. The previous administrator has no incentive to expedite the process as it would already have lost the client. This administrator is further motivated to drag its feet as it continues to earn an asset-management fee, another point of contention.

Asset-based management and administration fees increase in relation to the sum invested. The more a person saves and invests, the more he or she pays. In addition, the assets under management bear no relation to the cost of administration and should therefore be structured differently. A fixed cost per member per month, regardless of how much the member contributes or how much has been invested, would offer a more equitable approach.

Certain umbrella funds also choose to invest in portfolios which attract multi-manager fees. However, larger institutions tend to disclose only the top fees and not the underlying asset-manager fees. As such, the costs associated with managing assets is a key area that should be reviewed, especially as greater transparency would enable retirement savers to make more informed comparisons and selections based on performance and the associated costs to determine real returns.

While this echoes Gluckman’s calls for greater transparency to allow for easier cost and benefit comparison, the idea of a legal requirement for employers to obtain three quotes every three years is arbitrary and pointless. It’s a weak attempt to solve the real issue. If employers were able easily to evaluate rival umbrellas and switch to them with less hassle, other issues would fall into line.

– Michael Field, product development manager, FedGroup.

Sukha . . . practical examples

Investment for national good

The 2014 platinum strike highlights how weak labour relations can have a severe negative impact not only on stakeholders in one industry but also on the general economy. As TT frequently reminds us, we all have a part to play in addressing the country’s challenges. As an asset consultant I have had exposure to several innovative investment funds which are doing just that.

The first example addresses labour relations headon. An asset manager has set up an agricultural fund which aims to acquire agricultural land, develop it and thereafter exit after 10 to 12 years. The fund has a socially-responsible element in that the farms offer permanent workers free healthcare and free or upgraded housing where farms are far removed from local communities.

Regular training and skills development are provided. Farm workers are encouraged to attend English and maths classes which are recognised by the Department of Education. The classes are paid for by the fund. Farm workers who show potential are further trained in management roles.

The fund allocates a certain percentage of its budget to implement these social benefits with no impact on its outlook for long-term returns. These social benefits for workers have sparked interest from neighbouring farms as they see the positive effect, and not least because they are losing key workers who choose instead to work at the fund’s farms.

While conducting a due-diligence exercise on one of the farms in the fund, I was told how the farm workers voluntarily patrolled the boundaries during violent strike action from neighbouring farm workers. This was in an effort to prevent destruction of property. Workers genuinely believe that they have a vested interest in the farm due to the constructive way in which the owners engage with them.

The second example is an investment fund looking to provide expansion capital for established companies in an effort to boost job creation. This fund has negotiated a partial guarantee from the Jobs Fund to cover losses incurred should any of the underlying companies default on their obligations.

In the aftermath of African Bank, this guarantee is helpful especially in terms of partially "de-risking" the fund for investors. The fund aims to provide good riskadjusted returns for long-term investors and also play its part in job creation.

– Shainal Sukha, managing director, Shainal Sukha & Associates