In his keynote address to asset managers at the Raging Bull Awards gala evening in Cape Town last week, economist Dr Iraj Abedian, the chairperson and chief executive of Pan-African Capital Holdings, pulled no punches in telling the industry what it needed to hear: it has a fiduciary responsibility to invest the nation’s savings wisely, with due regard for risk; it must do more than pay lip service to socially responsible investing; it must provide better value for investors; and it must temper its obsession with short-term profits in favour of sustainable growth over the longer term.
Recent crises that have contributed to the industry’s tarnished image include Steinhoff, African Bank, and last year’s crisis in the listed property sector.
“Under your watch, and I would dare to argue that, in some cases, with some of your participation, hundreds of billions of the country’s national savings were destroyed ... and untold amounts of people’s life savings were subjected to the vagaries of the financial markets’ shenanigans,” Abedian said, also criticising regulators for letting many of these shenanigans carry on under their noses.
He reminded the audience just how important the industry was to the economy.
“The financial services sector contributes over 20% to the gross domestic product (GDP) of the country. It controls well over 90% of the national flow of savings. Moreover, as at June 2018, the financial intermediation, insurance, real estate and business services sector was the sector with the highest number of company income tax (CIT) taxpayers (24.6% assessed) in respect of the 2016 tax year. This sector is the single largest contributor to CIT; it accounted for 39.6% of the tax assessed in respect of 2016 (SA Revenue Service statistics).
“So this sector’s impact on the economy and national welfare is disproportionally higher than its share of GDP. Furthermore, by the virtue of its size and its structural and technical capabilities, the financial sector is a key source of South Africa’s global competitive advantages. Very few of the emerging economies have as sophisticated and capable a financial sector as South Africa.”
The financial services sector’s failures also had to be seen in the context of developments globally, Abedian said.
“The rising complexities within the financial sector have reached an all-time high. A powerful blend of globalisation, financialisation of economic structures worldwide, and digitalisation has transformed the sector. Significantly, there has emerged a marked uncoupling of the financial sector from the real economy.
“Each of these forces at play has a profound impact on the political-economic landscape of society. Globalisation has entailed considerable benefits in development and global poverty alleviation, and yet some of its adverse side-effects have been neglected, leading to the prevailing (populist) backlash against socio-economic integration. Meanwhile, the spreading financialisation of economic structures has led to a systemic over-concentration of global wealth and control over investment resources. The resultant rising maldistribution of income has reached untenable levels.
“Asset managers have a pivotal role in exercising principled and ethical judgment over the resources under their trusteeship. While it is true that asset managers do not have full control over the entire system of governance, they nonetheless occupy a critical position to catalyse and/or advocate for structural reform.”
Abedian outlined four areas that required attention:
1. Nature of investments. Abedian said although it had become fashionable to talk of socially responsible investing and “impact investing”, the allocation to such investments was still “negligibly small”.
“This has deep and wide political-economic and social-welfare consequences. It is ultimately around a judgment call about the use of national resources. It culminates in a critical impact on the structure of the economy, the promotion or stifling of entrepreneurship, the level of poverty, unemployment and the socio-environmental system of doing business.”
2. Shareholder activism. “It is evident that, based on the gigantic corporate failures of the recent years, the asset management industry is not discharging its shareholder activism suitably and consistently. No amount of grandstanding, empty posturing and public statements are a meaningful replacement for well-structured, effective and value-enhancing shareholder activism,” Abedian said.
3. Value generation and appropriation. Abedian berated the industry for not creating more value for investors, while being content to deduct as fees a percentage of assets, year after year, whatever the return on investment.
“Value generation in relation to value appropriation favours the asset management industry. Fees are too high ... In most cases, when all is said and done, over 40% of cumulative returns over the life of the investment are taken away from the investor.
“The question has to be asked: if asset managers snooze on the job, if they pile more and more into Steinhoff shares, NET1 shares, EOH shares, or any other shares in pursuit of short-term gain, and lose so much on behalf of investors, should they not forgo fees and pay back the bonuses that they have undeservedly pocketed the years before? Or more fundamentally, should not the fee and bonus structures be linked to the lifetime of the investor’s portfolio, as opposed to making the investor the residual claimant?”
4. Governance and assurance infrastructure. Abedian said the integrity of the auditing profession was crucial to a healthy business sector. “The recent revelations of a series of misconduct and governance failures by some of the major audit firms are of serious national concern... What is astounding has been the deafening silence of the asset management industry.
“For example, very few asset managers have put Old Mutual, Investec, Goldfields and others on notice for their continued use of KPMG, or McKinsey, or Bain & Co. How can such asset managers trust the annual financial reports of these listed entities, rely on the information put out by them, and make sound judgments when the quality of assurance services of KPMG is found wanting not only in South Africa, but also in London and elsewhere? By omission or inaction, the asset management industry becomes itself an enabler of poor governance.”
In conclusion, Abedian said that to rebuild the country’s capital market reputation, we need to embark on a systemic revamp of the legislative, operational and technical platforms, ensuring full alignment and effective accountability.
“The industry needs to proactively partner with the state to accelerate this much-needed reform. In turn, the state needs to demonstrate the ability to appoint effective and impartial regulators. Fundamentally, the asset management industry needs an ethical overhaul - from the unfettered pursuit of monetary self-interest to more balanced value creation and stewardship on behalf of investors,“ he said.