What is the future of the investment industry in South Africa? Will the industry consolidate in the face of tough economic times and shrinking savings, and if so, how will this consolidation pan out?
These questions were put to the CEOs of three of South Africa’s biggest investment houses – Hendrik du Toit of Ninety One, Anton Pillay of Coronation, and Derrick Msibi of Stanlib – at a recent investment conference hosted by discretionary fund manager INN8 Invest.
I recently wrote in this column that a shake-up was due for South Africa’s investment industry and that a consolidation of many of the 1 800 locally managed funds was in order. But perhaps I used the word “consolidation” too lightly without considering the complexities of merging investment companies.
De Wet Van der Spuy from INN8, who chaired the discussion, pointed out that there are more than 500 registered asset managers in South Africa, but the vast majority of these manage less than R10 billion in assets. This appears to be the threshold for running this type of business sustainably, especially if you’re an active manager employing an expensive team of market analysts to distinguish worthwhile investments from duds.
Also expensive is legal compliance. With heightened regulation of the industry, asset managers have needed an increasingly sophisticated compliance function to ensure that, somehow, somewhere, they are not breaking the law.
It’s not just South Africa where the industry is facing a shake-up. Van der Spuy quoted a PwC report predicting that 16% of asset managers globally will be swallowed up in the next five years – double the normal rate of mergers and acquisitions in the industry.
Pillay spelled out the challenges in South Africa: the market is not growing, there is no economic growth to speak of, savings levels are exceptionally low, the market is over-serviced, and there is increased competition from international firms. With this combination of headwinds, he said, you’re going to see more consolidation going forward.
But it’s easier said than done. Msibi said mergers and acquisitions have a high failure rate to begin with. It’s tough to integrate people-orientated businesses, and mergers take a lot longer to consummate than one would expect. He was certain there would be mergers and acquisitions, but was not sure they would result in the desired outcomes.
The problem, it seems, with merging small active asset managers is that each company typically comprises a tightly-knit team of professionals committed to a unique investment philosophy.
Ninety One’s Du Toit said one couldn't merge weak businesses for scale. He gave international examples of where acquiring for scale had not translated into earnings or cash flow.He said you can merge passive (index-tracker) managers because you don't have investment strategy issues, “but at the artisanal end, you'll never get this sort of consolidation because smart people like to work in small teams”.
I subsequently asked Msibi how he saw the industry evolving over the next 10 years. He was refreshingly upbeat. “We will continuously see funds being launched. Investment management is considered an attractive industry which will attract new entrants. At the same time, I am expecting that many funds will cease to exist due to lack of performance and general support from the trade, having unsustainably low flows.”
Msibi said consolidation will generally be positive for investors. “I think it will probably have a positive effect as stronger and relevant players join forces to offer propositions that are relevant to investors. Over time, it seems that poorly performing funds and asset managers lose money and may disappear. The industry is quite Darwinian in that respect.”
He said the industry needed to balance the globalisation of investment trends with South Africa’s unique circumstances. “As investors are exposed to other markets, they start to ask how they can access investment strategies they observe there. Therefore, the industry must respond to the customer’s needs. This requires appropriate safeguarding strategies for those investors that may tend to mimic what is done in the jurisdictions where these investment vehicles and strategies originate.
“I also think that South Africa tends to adopt practices which makes it an attractive investment destination and, therefore, is required to keep up with regulations from developed markets. Having said that, much effort is invested to ensure that we are cognisant of local conditions. This approach ensures the South African investment management industry remains one of the most progressive and developed,” Msibi said.
In my previous column, I suggested that the investment industry had become too sophisticated for the broader South African market.
But in the CEO discussion, Du Toit made an important point. We should be proud of our industry, which is on par with the best in the world and far ahead of some developed countries, let alone our peer emerging markets.
The problem lies in its “appalling” record in communicating the competitive advantage a sophisticated investment industry and the value of savings gives our country, Du Toit said.
He was referring mainly to its relationship with government, but he also said a wise thing, which applies to its relationship with consumers: “Don’t confuse sophistication with complexity.”
Which comes back to my point in the previous column: the industry’s marketing professionals need to establish a better connection with the average South African consumer. This means explaining benefits in everyday terms, avoiding the financial jargon that only a Chartered Financial Analyst understands, and devising simpler investment solutions.