MD's Letter

Old Mutual RAFI^® 40 Tracker Fund comes of age and we expand of our offshore tracking capabilities

By Craig Chambers

About four years ago we started researching a new trend in indexation called Fundamental Indexation or price-indifferent tracking. The most prominent of these new products had been launched two years earlier, in 2004, by a gentleman named Rob Arnott of Research Affiliates (RA) in California, USA. We then discovered that the London-based index company, FTSE had been awarded the global rights to license these Research Affiliates Fundamental Index (RAFI) indices and would be launching a FTSE/JSE RAFI Index in South Africa.

We immediately began the arduous research process of making sure that these indices were the real deal. Amongst other things, our researchers analysed the integrity of the data that RA was utilising, the reliability of the back-testing process (which used data going all the way back to 2002), the suitability of the four fundamental factors etc.

What we found impressed us and on 1 October 2007 we launched the first South African FTSE/JSE RAFI unit trust fund to coincide with the launch of the index on the JSE. Called the Old Mutual RAFI^® 40 Tracker Fund, this fund came of age on 1 October 2010 and celebrated its third birthday. As I am sure you are aware, a three-year return number is critical in the life of a unit trust - and this fund's performance has not disappointed!

Over the three years, the fund ranks 12^th out of the 69 general equity unit trusts in this sector. This top quartile performance has completely debunked the myth that low costs equal poor performance.  The fund's total expense ratio (TER) of 0.90% is almost 50% lower than the average TER within the general equity sector. In fact, our research has shown that when a fund has a robust, consistently applied investment process as well as a low TER, it has a much higher probability of achieving top quartile performance. It is common sense - a substantially lower TER is like a marathon runner starting a race 1km ahead of the field.

Without going into too much detail, the Old Mutual RAFI^® 40 Tracker Fund weights stocks based on four fundamental factors:

• cash flows,
• dividends,
• sales and
• book value.

These are value-based factors and, according to research done by the RA team are a good proxy of a company's intrinsic value or economic footprint. So what you are really getting is a hybrid fund that employs the cost advantages of index tracking with the return advantages of value investing. (For more on RAFI have a look at our latest research piece).

High demand for our low-cost offshore tracking capabilities
There are some exciting developments with regards to our offshore business, branded as Old Mutual Global Index Trackers (OMGxT). By December 2010 we will be managing funds benchmarked against the following global indices - the MSCI Emerging Markets Index, FTSE Emerging Markets Index and the FTSE Global Small Cap Index.

Our South African-based investment team manages these portfolios for offshore clients.  By December 2010 we will have been tracking global indices for 12 months. Our systems are world class, our team has matured into their new roles and our fees remain competitive (given our Rand cost base).

The South African office is now a fully fledged international tracker manufacturing hub. We can track any index, anywhere in the world, including African Frontier indices.

Old Mutual Global Index Trackers (Pty) Ltd, trading as Dibanisa Fund Managers in South Africa, is a licensed financial services provider, FSP 721, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Dibanisa Fund Managers is a member of the Old Mutual Investment Group (South Africa) (Pty) Ltd.