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An Old Mutual asset manager once bragged to me that fund management is a licence to print money. This is because fund managers rake in fees as a percentage of assets under management. It is therefore not surprising that there are more funds, than stocks, in which to invest. But, the flip-side of this story is that there are many mediocre funds and very few fund managers are able to outperform stock market averages, because these very fees that oil the wheels of the business erode investor returns. Recently it appears that Old Mutual was attempting to hide mediocre performance by merging a fund that has ridden on the back of the gold price surge with a struggling fund. But, some astute investors weren’t having it. Through the media, they protested loudly – and Old Mutual backed down. David Melvill shares the backstory. – Jackie Cameron
Old Mutual Gold Fund investors triumph as they show their mettle
By David Melvill*
The top performing Unit Trust Gold Fund is to remain open
The Old Mutual Unit Trusts this week elected to keep their Gold Fund open after putting their investors through a stressful ballot exercise. But why would they do this if they had had a successful ballot result in their favour?
Firstly, it is important to note that the Old Mutual Gold Fund has gained almost 100% over the past 12 months. This makes it comfortably the top performing Unit Trust in South Africa for this period. The next highest return is a Resource fund with 31%.
Old Mutual Gold fund chart for the last 12 months delivering 96% return
To be fair, this fund is the highest on the volatility index and therefore is not one for all investors. The Old Mutual says, “From time to time, we get calls, where people were not happy with the fund’s performance, because of its volatility. It’s difficult to explain to them the volatile nature of gold shares.”
The Old Mutual Unit Trust’s MD, Elize Botha, would tell you they are on the side of their clients. She says, “One of the things we’ve decided as a company is that we do listen to clients.” If that is the case, I would like to know why they did not first poll their investors and advisors beforehand and try and gauge their feelings and support?
The Old Mutual Unit Trusts fund managers in their circular argued that they need fewer funds and wanted to make it easier for their investors to be able to select which funds they would like to invest in. But the company does need to act in the best interests of all their investors.
With Old Mutual retaining their Gold fund, they now appear as the “knight in shining armour” that rescues their own fund for their investor’s sake. And while that may be so, we should see why that is.
Old Mutual ran a “successful ballot process” that meant they had obtained sufficient votes to dispose of the Gold fund. What they did not tell their investors is that the independent ballot carried out by KPMG there was only 15% of the fund’s value under management that was voted on. This response is however normal for a ballot.
Many investors are apathetic as they would believe their vote will not really count. This is especially true when the voting guidelines tell you that all the voters who do not vote will be regarded as voting in favour of amalgamating the Gold fund into the Equity fund.
Gold Fund members become activists
“This time it’s different.” Are the four most dangerous words when it comes to investing. But this was indeed the case this time. Many Gold Fund investors sought to keep the fund alive. Investors voiced their strongest disapproval directly to Old Mutual and many made sure they voted too.
One angry investor, Neville Stevens-Burt, went to see Martin Welz the editor of Noseweek and engaged his support. This led to an article being published under the title Old Mutual wants Gold fund ‘winners’ to be selfless losers. Or perhaps more descriptively put by its sub title, “Old Mutual holds a gun to the heads of its Gold Fund investors.” The merger was decried, in addition Stevens-Burt highlighted that all flexible investors would immediately be subjected to a Capital Gains tax if this merger proceeded and they cashed in on their investment to exit the fund.
Glacier, arguably the biggest platform for the Listed Investment Service Providers (LISP) in South Africa, said their mandate made provision for the trustees of the funds to vote for all their compulsory monies (i.e., the Retirement annuities, Preservation funds and Living Annuities).
At the time, Natashja Terblanche, the Head of Client Services and a trustee, said, “Our research team has said that there are NO material changes and no valid reasons to close the fund. They believe it is in the investor’s best interest to retain this fund. Therefore they voted against the motion for the Old Mutual Gold fund merging with their OM Equity fund.”
She added, “Our thinking is whenever the mandate is vastly different to the proposed fund’s mandate, we look to support the retention of the existing fund so that it is not merged into the proposed new fund.”
An independent pension fund advisor, Kevin Creasey, was extremely unhappy with the proposed Old Mutual’s decision, as many of his investors would be negatively affected by this move, he said, “Product providers should be required to Treat Their Customers Fairly and not destroy a product for which there is no alternative in South Africa.” He went on to add, “No participant would vote for its closure – otherwise he would have long ago moved his funds.”
Old Mutual not forthcoming with the results
Old Mutual Unit Trusts claimed that the results were in their favour, they did not tell investors was the actual result of the voters was nowhere near a reflection of this. It was only by default. Of the value of all the investors that voted, those voting to close or merge the fund were a mere 13%. The overwhelming majority of investors who voted, 87% voted to retain the fund.
Therefore it was impossible for Old Mutual to claim that the 85% that were apathetic, wanted the fund to close too. That would be stretching the truth too far.
After this exercise I got to speak with Old Mutual Unit Trust’s MD Elize Botha, to find out her side of the matter. I wish to say right at the outset she has impressed me no end. She said, “Previous ballots for other fund mergers were very low ballots of 0.5% to 1% would be against the merge. This was very different for the gold fund.”
Elize Botha was at pains to explain this unusual situation and the process to me, “As soon as I started seeing the early results coming through from KPMG, I became concerned. We had followed a long process that is followed by the industry. We started talking about the possibility of not continuing with the process pending the final results. We have never seen such an overwhelming result against what we had proposed before.” “We wanted to listen to our clients.” She explains, “It was my call, I pulled the plug. I advised the FSCA that we were not going ahead and would revoke our proposal.”
Unfortunately the process was well underway and I believe it is not easy to stop it at short notice. The Old Mutual Admin department wrote to their advisors on 29th October 2019 saying, “We wish to inform you our Auditors have confirmed that investors have voted in favour of the amalgamation of the above 2 Old Mutual Unit Trust Funds into the Old Mutual Equity Fund. We believe that the formal Financial Sector Conduct Authority (FSCA) approval is imminent and the funds will amalgamate on 31 October 2019.”
Elize Botha apologises: “We know that we were slow in getting the message out that we were not going ahead with the merger.” She owned up bravely and said, “It is my fault that we did not get the message out fast enough and cancel the note to the advisors and investors timeously that our admin department sent out because of the tight process.”
In mitigation she said, “It is important to note that we had very limited time to execute. There is not much time to finalise everything after receiving the outcome of the ballots from the auditors.” To her credit Elize Botha gave her undertaking, “I take full responsibility that we were not going ahead. Where there are investors that made their switches after the communication between 28 and 30 October, we will make good their losses and reinstate them into the position they should be.”
Unfortunately, from the note sent to the advisors, at the time, it appeared that Old Mutual was concealing the election results, as no one would make known the actual results, whilst stating they would obtain the necessary permission from FSCA, (the new body that replaced the old Financial Service Board) as if it was a mere formality.
Financial Sector Conduct Authority shows its ability to stand firm
As a direct result of this statement that I received, I sent my protest to FSCA. I was impressed with their immediate acknowledgement and their willingness to do their homework on the information available as to why the fund should be kept open. FSCA studied the results and suggested something of the order to Old Mutual, “Please go and rethink your decision.”
When I followed Ms Kedibone Dikokwe, the Divisional Executive of Conduct of Business Supervision at FSCA, for her comment she said, “I had a discussion with OM regarding this amalgamation and OM is reconsidering its decision to amalgamate the portfolios. They will communicate their decision to the clients.”
FSCA was not at liberty to elaborate on their discussion with Old Mutual.
Thereafter, I received a call from the Old Mutual Unit Trust consultant, saying they had changed their minds, and that they were continuing with the Gold fund as is and that they would only be merging the Resources Fund with the Equity fund.
“We wanted to listen to our clients.” Elize Botha added. “It was my call, I pulled the plug. I advised FSCA that we were not going ahead and would revoke our proposal.”
From FSCA’s point of view, they would not grant Old Mutual the approval sought from FSCA as hoped for. FSCA looked closely at the interpretation of section 99 subsection 3 (b) of the Collective Investment Schemes Control Act (CISCA). It states, “The proposed transaction must not be detrimental to any investor in an original scheme or portfolio.” It is my understanding this calls for the majority of investors to grant their permission for the amalgamation and for it not to be “detrimental to any investor” this process could not happen.
FSCA must also be congratulated for doing their job well and so ensuring that the fund investors were protected and that the fund remains open.
Gold Miners hit a new high and in a Full Bull market
Independent financial and business analyst, Liston Meintjes, on hearing the good news said, “We need wider options for investment diversification, not fewer. With more unit trusts by number but fewer ‘specialist’ funds, we would do the investing public a disservice.”
In his guide to his weekly chart’s, Liston’s approach to the charts is, “It is not the ‘charts’ that tell the story but the interpretation of the behaviour and sentiment of the market participants! The chart below of the Gold Miner’s Index, hits a new high this week and it is in Full Bull mode. Investors are investing into the gold mines indeed.
Liston’s comments: [I am still amazed how many commentators do not know a Bull Market – even when it bites them in the bum.]
Kevin Creasey, reminds us, “Given the world’s uncertainty and, the massive spiralling debts, the low and negative interest rates, BREXIT, Hong Kong, and Trade wars, gold is our BEST insurance on offer. In terms of product offerings. Clients cannot own physical gold (Krugerrands or a Gold ETF) in their Unit Trust portfolios, there is only one way – the unique Old Mutual Gold fund.”
Mining director of Mergence Corporate Solutions, and long-time mining specialist and past fund manager, Peter Major, for who I have the greatest respect, commented on the primary reason why he thought we so needed to see the Old Mutual Gold fund remain active said, “South Africans’ have over 1 000 Mutual Funds to invest in. But look behind this numbers and see what the reality is. Most of the funds are Hodge Podges. Replicas of each other.”
He continues, “An astute investor wants a selection of Specific Index funds to choose from. A Pure General Equity Fund, A Pure Bond Fund, A Pure Industrial Fund, A Pure Banks Fund, Real Estate Fund, a Pure Resource Fund. A Pure Platinum/ PGM Fund. A PURE Gold Fund. An Oil Fund (or ETF), etc.”
Furthermore, Peter Major says, “There are 60m people in SA today. There are millions of investors who like, trust and want some gold. Old Mutual deserves the right to launch and withdraw their products – as it economically (or other) suits them. But I would think they could easily justify the cost of running a Gold Fund. What’s a fund manager and a bit of admin and marketing really cost – for a fund that is close to R1bn in size? Certainly the economics MUST be there!”
Meryl Pick, the Old Mutual’s Gold Fund manager, has made good calls on her fund selection and should be commended for being courageous. Under her guidance the fund has grown to a respectable size of almost R¾ billion. It is totally viable and presumably made up of many small investors.
The writer, as a long time gold bull, knows investors in this fund have patiently sat through years of underperformance. Some of our clients have been loyal supporters of this fund for 20 years. It looked like they were going to be denied the opportunity to receive these higher returns. Happily, they have now triumphed!
This little victory for small investors is indeed cause for celebration. On the announcement of this good news the Gold Fund was up a whopping 6% for the day. Ironically, the Equity fund may at best deliver that return for the entire year.
In these uncertain times, gold is perfectly uncorrelated. Furthermore, my greatest joy will be complete if I know investors who have not yet embarked on acquiring gold exposure were to avail themselves of an investment of 5-10% in gold.
- David Melvill is an independent investment advisor. He can be reached at [email protected].
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