Words on Wealth: Shake-up due for SA’s investment industry

The Johannesburg Stock Exchange (JSE) in Sandton. Picture: Timothy Bernard

The Johannesburg Stock Exchange (JSE) in Sandton. Picture: Timothy Bernard

Published Aug 27, 2023


Our local collective investment industry attracts many of our brightest minds and boasts a level of sophistication and expertise to match the best in the world. I have always marvelled at this, considering how few South Africans consciously save.

Strange as it may seem to an outsider, there is a great deal of money in savings and investments in South Africa – assets under management in collective investment schemes total just over R3 trillion, and, barring a slight reversal in Covid times, they have shown a steady increase year-on-year.

The assets are mainly in retirement savings and annuities: statistics for linked-investment service provider platforms on the Association for Savings and Investment SA (Asisa) website show that about two-thirds of assets in collective investments are in retirement-related vehicles and the remaining third is discretionary savings.

Call me a pessimist, but I can’t help feeling that the industry is on the cusp of a change for the worse, unless by some miracle our country can pull itself up by its bootstraps and begin seriously growing the economy and enabling meaningful employment.

First of all, the bright young minds that populate our industry will not stay around for long if opportunities in South Africa start to dim. They’ll be snapped up around the world where their talents will be valued and put to good use.

Second, wealthy investors will move their money out of the country, and by this I mean completely out, not just into offshore feeder funds that pay out in rands. And if the government clamps down on offshore allowances, which it may do if it gets desperate, the rich will find a way – they always do.

Third, the local investment universe is shrinking, in particular the number of listed companies on the JSE. There are a number of reasons for this, but the upshot is less choice for investors and a warped supply-demand dynamic.

Apart from these ramifications of an economy in decline, I believe the investment industry is due for a collective shift in mindset. It must descend from the rarefied atmosphere in which it finds itself, catering to a tiny fraction of the population, and start offering simpler, low-cost products that are accessible to the broader South African market.

The number of collective investments offered by South African asset managers is mind-boggling. At the end of 2022, there were 1 805 local collective investment schemes, according to Asisa. These comprised 236 institutional funds and 1 569 retail funds. The vast majority were unit trust funds – only about 90 were exchange traded funds (ETFs), despite the surge in popularity of ETFs worldwide. There are three times the number of funds as listed companies on the JSE, which have dwindled to about 600.

As they have proliferated, funds have become increasingly specialised in their investment strategies. Here are a few examples, brand names deleted:

  • Scientific Beta Multi-Factor Index ETF
  • Enhanced Core Cautious Fund
  • Conservative Dynamic Asset Optimiser Fund of Funds

If you weren’t a Chartered Financial Analyst would you know what an investment factor is, let alone a multi-factor index?

Three trends in the industry have driven this proliferation over the past decade: the rise of third-party funds, multi-managed funds and index trackers (unit trusts and ETFs)

  • Third-party funds. These are funds managed by small “boutique” firms that operate under licences granted by large unit trust management companies. About 900, or half of local collective investment schemes are third-party funds.
  • Multi-managed funds and funds of funds. These are funds whose managers don’t invest directly, but channel investors’ assets to fund managers and funds that do invest directly, adding another layer of administration and costs.
  • Index tracker funds. These passive investments (unit trusts and ETFs) were originally introduced to offer investors low-cost, simple investment solutions. Market indices have traditionally been tools to measure market performance; now index providers such as MSCI and S&P Global are designing custom indices for passive fund managers, and they are becoming more specialised and nuanced. Which defeats the objective of going simpler, I’d have thought?

Of the roughly 45 million adults in South Africa, about a third, 15 million, are registered taxpayers, according to the 2023/24 projections in the 2023 Budget Review. Of these, half fall under the income threshold to pay tax. Only about four million taxpayers in South Africa earn more than R250 000 a year. Presumably, this four million would form the base target market for the investment industry. But financial literacy in this broader group remains very poor. I doubt many would know what a unit trust fund is, very few would know what an ETF is, and only a handful (the CFAs among us) would know what an investment factor is.

I believe two things need to happen for the investment industry to remain relevant. First, some consolidation needs to take place – 1 800 is just too big a number of funds for such a small market. Second, marketing professionals need to take the upper hand and explain to the investment professionals that niche investment strategies – like the late artworks of Picasso or the string quartets of Bartok – will never appeal to large numbers of people.

Last week we saw a possible sign of change: Satrix, which bought out Absa’s ETF business, closed three funds that “were not scalable”: the Volatility Managed SA High Growth Equity ETF, Volatility Managed SA Moderate Equity ETF and the Volatility Managed SA Defensive Equity ETF. Given their names, I’m not surprised they failed to attract investors.

Note: “investment factor” refers to a category of shares with similar performance and risk characteristics

* Hesse is the former editor of Personal Finance