More light is coming into the murky world of guaranteed funds. Old Mutual, which has 64% of the market, opened its funds to auditors recently.
And there was certainly more detail in the latest Alexander Forbes guaranteed fund survey than before.
The first lesson has been that those pension funds which moved out of traditional guaranteed funds into new-generation fully vesting funds did not do their members any favours. The old series guaranteed funds have quite onerous termination conditions: Old Mutual reserves the right to pay funds out over 10 years if they want to take the full book value of their investment. In contrast, the fully vesting CoreGrowth product has a one-month notice period.
But to support this, CoreGrowth is much more conservatively invested. Last year, CoreGrowth's bonus was just 7,55% compared with 9,65% in the guaranteed fund; this year the gap will be even wider.
Compounded over time, there will be a large gap between the Guaranteed Fund and CoreGrowth returns.
Traditional guaranteed funds should provide almost the same return as market-linked balanced funds over the long term, but the fully vesting funds, because they have to carry a lot more cash in order to be sure to declare positive bonuses every month, are not well positioned to give competitive returns in the long term.
Fully vesting funds might be useful for investors in the last couple of years before retirement but they are not appropriate for the full body of retirement fund members.
First there were the investment boutiques, but some of these now look more like 1 500 m² chain stores than niche 300 m² boutiques.
Will firms such as Polaris Capital, with R10bn under management, or Re:CM with R5bn, be victims of their own success? They will need to show the courage to cap their assets or else they will have to make the transition to full service manager, as Allan Gray did in the late 1980s and Investec in the late 1990s.
Most micro boutiques want to operate in hedge funds. An exception is Rhett Hammond, who is launching the long-only Ankh Flexible Fund on January 3 .
If anybody has first-hand experience of the dangers of growing too big, it is Hammond: the flow of money into Investec Emerging Companies was colossal, and the fund grew to R4bn at a time when fewer and fewer small-cap shares provided value for money.
Hammond says the new fund will be capped at R2bn and that, as a flexible fund, it has the right to move entirely into cash when the JSE is overvalued. But, he says, because equities are by far the most effective hedge against inflation in the long term, the fund will be 85%-90% invested on average.
He expects the fund will be 75% invested on day one, indicating some caution after the heady run of the past 30 months.
The fee structure will follow the style of a hedge fund. There will be a basic fee of 1,5% (though Hammond plans to reduce this once assets exceed R100m) and a performance fee of 10% for all returns above short-term interest rates plus 3%. There will be a high-water mark so that if there are negative returns, these will have to be made up before performance fees are charged again.
So why should he not just opt to run a hedge fund?
His reply is that there isn't enough depth in the market, with limited opportunities for pair trading (we have only one paper share and one oil share, for example) - and once there is a bear market, he argues that it will prove the emperor has no clothes, and that most hedge funds will not escape market declines unscathed.
In a market in which there are numerous dodgy broker funds, run by people who should never have been given a fund management licence in the first place, Ankh Flexible looks like a credible offering.
