Sanlam: SIM SCI Small Cap Fund Amalgamation Into General Equity Portfolio

• Sanlam Investment Management proposes to amalgamate its SIM SCI Small Cap Fund, SIM SCI Financial Fund, and SIM SCI Resources Fund into the SIM SCI General Equity Fund on October 9, pending investor approval.
• The consolidation is driven by limited investor demand for specialist funds, a desire for improved cost efficiency, and enhanced portfolio diversification.
• The SIM SCI Small Cap Fund, with R233 million in assets, will merge into the SIM SCI General Equity Fund, which manages R9.8 billion.
• Investors will shift from specialist mandates to a diversified South African equity allocation, with small-cap exposure becoming part of a broader portfolio.
• The amalgamation is expected to potentially add downward pressure on small-cap share prices as the larger fund may divest inherited smaller holdings.

Consequently, investors currently holding units in the SIM SCI Small Cap Fund will transition from a mandate focused on small and mid-cap companies to a broader, diversified South African equity allocation.

Sanlam Investment Management (SIM), which was acquired by Ninety One Investment Management (Pty) Ltd in February 2026 and is now part of the Ninety One group, is undertaking a significant investment fund restructuring, proposing the amalgamation of several specialist unit trusts into its larger SIM SCI General Equity Fund. This move, subject to investor approval, is slated for October 9. The SIM SCI Small Cap Fund amalgamation is a key part of this consolidation, alongside the SIM SCI Financial Fund and the SIM SCI Resources Fund, all of which are set to merge into the general equity portfolio.

This Sanlam unit trust merger reflects a strategic shift, driven by evolving investor preferences and the operational realities of managing niche portfolios. Sanlam Investments communicated to investors that these specialist funds, established between the late 1980s and early 2000s, were designed to meet specific market demands at the time. However, in recent years, they have experienced diminished investor interest, leading to relatively small asset bases.

Operating specialist funds at a reduced scale can compromise cost efficiency and limit the diversification benefits available to investors. The proposed amalgamation aims to enhance the overall scale of the combined entity, improve cost efficiency by distributing fixed expenses across a broader asset base, and provide investors with a more diversified South African equity portfolio. The overarching objective of long-term capital growth from South African equities will be maintained.

Consequently, investors currently holding units in the SIM SCI Small Cap Fund will transition from a mandate focused on small and mid-cap companies to a broader, diversified South African equity allocation. In this new structure, exposure to smaller companies will be integrated as a component of a wider portfolio, rather than constituting a standalone investment strategy. This South Africa fund amalgamation represents a notable example of investment fund restructuring in the local market.

The SIM SCI Small Cap Fund, central to this consolidation, held assets under management (AuM) totaling R233 million at the close of July 2026. In contrast, the SIM SCI General Equity Fund, the recipient portfolio, is substantially larger, boasting an AuM of R9.8 billion, making it more than 40 times the size of the small-cap offering. This significant disparity in scale underscores the rationale behind the investment fund restructuring.

At the end of June 2026, the small cap fund's portfolio comprised holdings in 37 listed companies. Its top five holdings, each representing between nine million and 12 million shares, included Grindrod, Advtech, Famous Brands, Netcare, and Premier Group. Notably, six of its holdings—Discovery, Remgro, Reinet, Northam Platinum, Sasol, and Pan African Resources—were also part of the JSE Top 40, potentially having been acquired before they attained large-cap status.

The SIM SCI Small Cap Fund's investment philosophy is characterized as an aggressive, actively managed approach, seeking maximum capital appreciation by investing in small to mid-market capitalization companies. These companies are identified for their potential to deliver above-average earnings growth and are often perceived as mispriced by the market. While the fund has the flexibility to invest up to 45% of its assets offshore, it currently holds no direct international assets.

The SIM SCI General Equity Fund, into which these specialist funds will merge, holds shares in 55 listed companies. There is already an overlap, with 18 companies held in common by both the small cap fund and the general equity fund. The general fund's core holdings, each exceeding 5% of its portfolio, include prominent South African entities such as Naspers, Gold Fields, FirstRand, AngloGold Ashanti, Standard Bank, and Capitec.

The proposed small cap fund consolidation is anticipated to exert additional downward pressure on the share prices of listed small-cap companies. This expectation stems from the likelihood that, following the amalgamation, the significantly larger general equity fund will seek to divest many of the smaller, more specialized holdings inherited from the SIM SCI Small Cap Fund. While these holdings would constitute a minor fraction of the combined fund's overall assets, there would likely be little strategic justification for retaining stakes in companies like Grindrod, Advtech, and Famous Brands, given the general fund's existing core positions.

Sanlam's rationale for this South Africa fund amalgamation centers on enhancing operational efficiency and improving investor outcomes. The firm highlighted that the specialist portfolios, despite their historical relevance, had become relatively small due to limited investor demand. This scale presented challenges in achieving optimal cost structures and providing broad diversification. The investment fund restructuring is designed to address these issues.

By merging into the SIM SCI General Equity Fund, the combined entity aims to achieve greater economies of scale, allowing for the more effective spreading of fixed operational expenses across a substantially larger asset base. This strategic move is intended to position investors within a more robust and diversified South African equity portfolio, aligning with contemporary investment trends that favor broader market exposure over highly specialized, smaller mandates.

While the immediate impact of additional holdings from the amalgamation might not drastically alter the composition of the general equity fund, particularly given the existing overlap, a rebalancing effort is expected over time. This rebalancing will be particularly pertinent for the financial and resources sectors, considering the simultaneous merger of the SIM SCI Financial Fund and SIM SCI Resources Fund into the same general equity portfolio.

Lawyers advising fund managers or investors should note this amalgamation as a precedent for fund consolidation driven by efficiency and diversification, and assess its implications for portfolio strategy, regulatory compliance, and investor communication regarding changes in investment mandates.

Source: Original reporting via industry analysis.