OMIGSA's UMBONO Fund Managers wins license to track new FTSE/JSE RAFI Index

Umbono wins exclusive license to track RAFI Index

Umbono Fund Managers, the specialist boutique in Old Mutual Investment Group SA (OMIGSA) focused on cost-effective equity, bond and enhanced tracking investment solutions, has been awarded the exclusive license to develop a fund tracking the new FTSE/JSE RAFI (Research Affiliates Fundamental Index) Index in South Africa.

Originally developed in the US in 2004 by Robert Arnott, Chairman of Research Affiliates, the RAFI is based on the fundamental indexation concept that relies on four fundamental measures - free cash flow, book equity value, total sales and gross dividends instead of market capitalization, to determine portfolio weightings. FTSE Group, the global index provider, holds the exclusive rights to calculate and license the FTSE RAFI Index Series.

At the launch of the new index at the JSE in Johannesburg on Monday, Umbono Deputy MD Craig Chambers said: "We are excited to be able to offer the advantages of tracking this index to all South African investors through our Old Mutual Umbono RAFI Tracker Fund. This methodology has already proved to be very popular with investors worldwide, and we are confident that the SA market will be no exception; our fund should prove to be an excellent core building block in investors portfolios. In fact, we are pleased to be able to announce that Old Mutual SA intends to invest an initial R300 million into our Old Mutual Umbono RAFI Tracker Fund."  

Fundamental Indexation-related funds have attracted over R140bn in investments across 35 countries in the last 18 months. In fact, respected global investment professionals are predicting that this product will reach $100bn faster than any other product in history, Chambers says. In the US, the exclusive mandate for the RAFI tracker fund is held by Charles Schwab, one of the world's largest mutual fund providers.

"The main reason for the concepts appeal is that it avoids market sentiment by not using share price as a basis for calculating the index," he explains. "Share prices do get caught up in sentiment and ignore fundamentals at times, adding to volatility. The RAFI methodology attempts to strip out this volatility this is especially prevalent today as investors find themselves exposed to increased levels of equity volatility. The methodology involves taking a simple average of each company's four financial measures over a five-year period to create a portfolio of 40 shares that is largely representative of the South African economy. To reflect any changes, the index is re-balanced annually."

Interestingly, Chambers observes, although the largest companies in the FTSE/JSE Top 40 Index are all included in the RAFI (albeit with lower weightings), some non-Top 40 companies present in the RAFI include Highveld Steel, Nampak, Afrox, African Bank Investments, Pick n Pay, Santam and Metropolitan.

Retrospective research conducted by Research Affiliates on the theoretical historic performance of the RAFI South Africa showed an annualized return of 23.3% between 1994 and 2007, an outperformance of 4% a year relative to the equivalent cap-weighted index.

"Although past performance is no guarantee of future results, we are confident that this concept is not simply a good theoretical idea it has performed well in other countries since its launch," he says. "In our view Fundamental Indices are a great hybrid between active and passive fund management; they provide an excellent risk-adjusted benchmark for our local equity market. Our Old Mutual Umbono RAFI Tracker Fund will offer investors cost-effective access to this index. We specifically design our funds for institutions and individuals looking for low-cost, low-risk core equity holdings," Chambers concludes.