Not enough is being said about the unintended consequences of the current “push” towards umbrella funds. Let me be clear, I support a more professionalised and consolidated umbrella fund dominated environment in South Africa, but we are missing a few critical conversations that if not addressed could have a materially negative impact on members. Here’s one:

Just about all umbrella fund sponsors have their own “in-house” investment capability which controls the allocation of capital to asset managers (some of which are in-house). This does not bode well for the investment industry which is already highly concentrated and could become even more so.  Boutique/new managers have a very limited chance of “breaking through” to create competition and become sustainable – this has a serious knock on impact on our publicly listed companies (i.e. the JSE) given the concentration of assets in our investment industry, capital will just keep being directed to large companies. Already our larger asset managers are limited in terms of which listed stocks they can buy without buying the whole company! Surely this will make matters worse?

Some smaller umbrella funds invest in small or emerging managers. However, these allocations are minimal compared to the giant umbrella funds, which tend to favour in-house or “large” managers. This disparity impacts black-owned, women-owned, and emerging asset managers, who face intense competition for limited funding in hotly contested spaces beyond umbrella fund allocations. In an industry where transformation is tantamount to sustainability, the focus by a few mega-funds on similarly mega asset managers is not aligned with the spirit of B-BBEE in the financial industry. This hinders healthy competition, which would ordinarily support reduced fees and bring about innovation. Furthermore, the concentration of investments limits diversification, which is crucial for achieving better performance through style and alpha diversification. Ultimately, the industry must prioritise sustainability and equitable opportunities for all asset managers, considering what is in the best long-term interest of members.

Excessive concentration with the majority of the SA workforce having membership of a handful of “mega-funds” (whether commercial umbrella funds or others like the GEPF and the various “industry funds”) will indeed be a mixed blessing. Of course it has always been difficult for new investment managers to gain critical mass, and there has always been a “pull” to the big established names. But yes, increasing concentration will not make it easier for smaller and newer firms. The insurers and multi-managers will reply that they have “incubator” products that look for new manager talent, and of course several of the large commercial umbrella funds do offer an open-platform architecture that allows larger participating employers (guided by their professional advisors) to build their own investment blends – so I don’t think the door will ever be completely closed for smaller and newer managers. Umbrella fund trustees should probably try a bit harder, however, to ensure that manager blends do not have excessive “house bias” towards the sponsor. Overall, it would be good to see umbrella fund trustee boards showing a bit less deference towards their fund sponsors.

From an active asset-manager’s vantage, commercial umbrella funds create welcome cost scale yet produce a few potentially material adverse side-effects. Here are three:

1. Allocation concentration & systemic risk: the four largest umbrellas already control > R540 bn (Source: Grayswan Umbrella Funds Survey Dec 2024) – which is a meaningful percentage of retirement fund assets – meaning in reality just a few investment committees now set the benchmark for most pooled flows, heightening correlated trades and thinning price discovery in illiquid local markets. This will naturally constrain the opportunity to produce returns in excess of the benchmark for these funds.

2 Governance friction: boards built for six-to-eight trustees are overwhelmed by mega-fund complexity; and inevitably there is the risk of independence eroding when the same individuals sit on multiple sponsor-run boards. This in turn encourages group-think and perceived conflicts through favouring in-house product selection.

3 Transformation and responsible investing stalls: despite Regulation 28’s intent, the evidence shows large umbrellas have not meaningfully channelled mandates to black entrepreneurially founded firms, whether advisers or managers, and sponsors’ reluctance to open architecture limits emerging-manager access —slowing industry transformation and narrowing the opportunity set for external managers. In addition, centrally designed default portfolios can distance employers and members from stewardship decisions, diluting differentiated alpha and responsible ownership. For active asset managers these dynamics shrink mandate pipelines, compress fees and, ultimately, risk poorer long-term member outcomes – the very deficits consolidation into umbrellas was meant to address and correct.

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