The evolution of the South African and global investment landscape
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By Victoria Reuvers
At the recent 2021 Morningstar Investment Conference, I had the privilege to sit down with Tamryn Lamb, head of retail distribution at Allan Gray and Joanne Baynham, wealth manager and AssetTV presenter, to discuss the evolution of the local and global investment landscape.
The industry has evolved to include an array of different investment options, structures, vehicles and providers. Asset managers, platforms and financial advisers are having to adapt their approach, offering, capabilities and knowledge constantly, as the industry keeps innovating and adapting to changing customer needs, regulations and product offerings.
The discussion focused on a range of prickly and prominent industry issues – such as the flow into foreign investments; growth of ETF and passive investments; the current 40% cap on foreign investments being imposed for living annuity and endowment products on certain platforms and the impact thereof; and the influence of regulation on the industry and end-consumer. With great difficulty, I’ve highlighted a few topics below that I believe will continue to evolve, challenge and impact the investment industry.
The discretionary fund management (DFM) industry is growing
Over the past two to three years, the DFM industry, which is still very much in its infancy in South Africa, has evolved and grown immensely. DFMs first launched in South Africa around 2010, mainly due to the introduction of the Financial Advisory and Intermediary Services (FAIS) Act, the explosion in fund choice and the functionality that allowed for the creation and ongoing management of model portfolios. It is, in essence, an evolution of multi-management. Originally DFMs came out with great functionality; today the industry has seen a sharpened focus on investment outcomes and product development.
Financial advisers often struggle to balance client service with the time-consuming work required to run a practice, including administrative activities, research, due diligence, investment transactions, compliance, training and professional development. One solution is to outsource specialist areas of financial planning to experts who focus on that sole job to free up time to focus on holistic advice and clients. Increasingly, advisers are deciding to partner with providers of discretionary investment management to provide a focussed outsourced investment capability. By partnering with a discretionary investment management provider, an adviser can create a better distinction between financial planning and investment management.
Linked investment service providers (Lisps) are evolving
As Tamryn Lamb pointed out, Lisps in South Africa have been around for more than 20 years. Where it initially started as a limited and sometimes gated industry, it has since evolved to welcome competitors and a more open architecture. Nowadays, platforms in South Africa ultimately build offerings around adviser demands, adjusting and evolving business models in line with what advisers and clients want. Over the last five years, platforms have invested significantly in the model portfolio functionality as it has been a common theme arising from advisers. Platforms are evolving to better adapt to and satisfy adviser and end-consumer needs when it comes to investing and fee structures.
The chicken and the egg conundrum
We debated the structural inequality and systemic risk that exists with a handful of large managers, managing more than 70% of the industry’s assets and a large number of emerging managers struggling to gain market share despite fantastic performance and attractive investment propositions.
As much as the industry has evolved, we are still faced with the chicken and the egg dilemma when it comes to smaller, boutique managers. There is no doubt that there are some remarkable smaller/boutique managers in South Africa. However, platforms require asset managers to have reached a certain size in assets under management before they can be listed on a platform. With that being said – how does a boutique then grow their business, without being listed on the platforms through which advisers invest their clients’ money? It does raise the concern about how emerging talent will grow while the incumbents hold the key to distribution?
This has of course, given rise to the evolution of consolidation. Instead of being stuck between the chicken and the egg debacle, smaller asset managers are choosing to rather join larger asset managers or to combine forces with other small managers to form larger managers and gain the necessary scale.
Consolidation is something that we have seen globally and although barriers to entry might be low in South Africa, the barriers to stay in industry are quite high. It is actually surprising that there hasn't been more consolidation within the boutique space in South Africa.
The consolidation we've seen recently does also pose its challenges - in many cases, consolidation is convenient in terms of the numbers and the monetary appeal but not necessarily an alignment of investment interests. With that said, this isn’t an issue that is unique to South Africa. The trick here is to find a good match in terms of resource, investment philosophy and product. Unfortunately, that is a lot easier said than done.
ESG (environmental, social and governance) investing is here to stay
There has been a growing demand from investors to invest in funds, companies and causes that will act in the best interest of the environment, humankind and companies that do the same. As much as the industry is doing its best to evolve to be able to offer credible products to satisfy end-investor demand, the industry is still in its infancy in South Africa. Most of all, we need to take a step back to define exactly what ESG means and looks like in a South African context.
For example, should we be buying into funds targeting climate-positive investments only, or should we be targeting asset managers that think holistically about how they incorporate the ESG into their investment process?
In South Africa, one of the biggest confusions is how ESG is defined in the retail space. Greenwashing has also become a problem globally. This is where a fund, company, or product is marketed in such a way that it is made out to be environmentally friendly, yet when you drill down to the specifics, it is not at all. End investors can rest assured, that the industry is moving as quickly as it can to offer a viable product, however, we need to act in the best interest of the consumer in terms of the product structure, fees, performance and risk, to name but a few.
Fees will always remain a topic of interest
Consumers will continue to demand lower fees, as they continue to see the impact of these fees on their investment performance in the long term. Again, this will continue to have a knock-on effect of the adviser demanding lower fees from asset managers, DFMs and Lisps. Essentially, everyone in the industry (and value chain) will continue to demand lower fees.
I foresee growing DFMs requiring different fee classes from asset managers and Lisps, possible shifts in the percentage split of fee that is allocated to the asset manager versus the DFM or adviser. One also can’t discount the power of competition – the more industry players lower their admin fees to remain competitive, the more cost will come down overall. At the end of the day, however, it will also boil down to the quality of the product and service that is provided. Industry players will be willing to pay for quality services and products, and there is only so much they will sacrifice for lower fees. The transparent fees resulting from the Retail Distribution Review (RDR) have helped address some of these concerns, however, we are still seeing the layering of fees in different areas. With this being said, we all agreed that we don’t foresee fee compression for quality, independent financial advice.
My hope for the future of the industry is – firstly, a defined value proposition that is centred around good investment advice and providing good investor outcomes. Secondly, the evolution of platforms and technology that will enable advisers to select the best products, services and funds for their clients to continue to enable investor success. Thirdly, the integration of technology across products, platforms and services that allows advisers access to investment options that serve their investors well. And lastly, that everyone in the value chain puts the end-investor first. None of us would be here if not for our clients.
Victoria Reuvers is Managing Director of Morningstar Investment Management South Africa.
This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns.