Private Market Investments and the Umbrella Fund Challenge

For many large employers offering retirement benefits, umbrella funds are a cornerstone of capital stability and growth. By pooling resources from multiple employers, these funds deliver economies of scale, professional governance, and administrative efficiencies that standalone corporate funds often cannot match.

However, as Raazia Ganie, Executive Head of Investments at NMG Benefits, notes, decisions to join or exit an umbrella fund require careful consideration: “Umbrella funds are designed for long-term capital growth. Switching funds for short-term gains can be far more costly than many employers realise.”

Umbrella funds provide scale and flexibility, often enabling access to a wider range of asset classes. Increasingly, they allocate capital to private market investments such as infrastructure and private equity assets that offer the potential for higher returns and tangible economic impact. For example, some funds have invested in truck stops along key national routes, generating real returns while creating jobs and supporting local communities.

The liquidity challenge
Private market assets are inherently illiquid. Unlike listed equities or bonds, infrastructure and private equity investments cannot be easily sold or transferred particularly in South Africa, where secondary markets for these assets are underdeveloped.

“The issue is not poor investment quality,” explains Ganie. “It’s the complexity of transferring these assets when moving between funds. These are members’ savings and cannot simply be ignored or written down. Given the long-term nature of both private markets and members’ retirement horizons, they are well aligned, provided administrators and platforms taking these assets on can accommodate them from a systems and governance perspective.”

Hidden costs of switching
Another key consideration is asset overlap. In South Africa’s relatively small market, moving from one umbrella fund to another often results in buying and selling the same equities and bonds. While the provider changes, trading and administrative costs remain, and these costs are typically borne by members.
To diversify returns, many providers include private market assets in their portfolios. While these investments carry risk and a “J-curve” effect, they generally deliver higher returns over time and align with National Treasury’s encouragement to invest in assets that support economic growth.

When is switching justified?
Ganie stresses that changing umbrella funds should not be driven by short-term performance or minor administrative frustrations. Valid reasons include serious governance concerns or persistent service failures. Regulatory guidelines may also be needed to minimise unnecessary costs incurred when changing providers, only to repurchase the same assets elsewhere.

The strategic imperative
Investing in umbrella funds, especially those with private market exposure requires patience, informed decision-making, and professional advice. While the rewards include enhanced returns, social impact, and alignment with national policy, poorly considered switches can erode value and undermine long-term outcomes.

“An experienced adviser helps employers and trustees evaluate not just returns, but the full cost and implications of moving funds. A trusted, long-term partnership ensures decisions are aligned with employees’ best interests over decades and not short-term performance,” concludes Ganie.

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Author: T M from ByDesign Communications on behalf of NMG Benefits.

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