Corporate and investment bank Rand Merchant Bank (RMB) expects the SA management industry to shrink further in the next five years with companies with assets under management (AUM) of less than R10bn at risk of becoming economically unviable in a tough trading environment.
Isabella Mnisi, RMB’s sector head for asset management and funds, said the number of SA asset managers is expected to shrink by 3% over the next five years, continuing the trend of consolidation in an industry faced with rising challenges.
She said the assets under custody of struggling firms are expected to move to other asset managers or acquiring firms.
“The traditional SA asset management industry continues to face severe challenges, not least stalling economic growth, policy uncertainty and growing negative sentiment towards SA Inc,” Mnisi said.
“We expect that much of the future consolidation is likely to come from asset managers with AUM of less than R10bn as they are simply too small to be economically viable.”
In December 2022, Moody’s lowered its outlook for the global asset management industry from stable to negative. It cited factors such as an operating environment that has grown more volatile since central banks began raising interest rates and Russia invaded Ukraine.
A need for consolidation has been evident across the asset management space over the past year.
Rathbones and Investec’s private clients arm have merged, creating a £100bn (R2.4-trillion) UK-based discretionary wealth manager.
Infrastructure funds will be a long-running investment theme for SA as they attract more money as the country focuses on the urgent economic and social infrastructure needs.
Mnisi said in SA, consolidation is not the only change the industry is facing as the fabric of the industry is expected to shift towards the greater return potential of local infrastructure and private equity investment as well as a greater demand for offshore investing.
“In SA, 65% of money has historically been invested in locally listed equity. With dimmer equity prospects, investors are now looking to an area of the economy where there is growth and prospects for returns are good such as alternative assets — and particularly infrastructure-related assets,” Mnisi said.
“Infrastructure funds will be a long-running investment theme for SA as they attract more money as the country focuses on the urgent economic and social infrastructure needs.”
Mnisi added that infrastructure investing skills in the investment management sector are mostly situated within larger asset management houses such as Sanlam and Old Mutual which will need to draw in further skills.
“Many smaller, non-traditional fund managers will find it uneconomic to try to compete with larger players in infrastructure offerings. They will likely join or be acquired by larger asset managers.”
One of SA’s biggest asset managers Stanlib has already warned that the industry will face more headwinds than tailwinds in the next two to three years.
This is because how well the sector does depends on how much savings there are for it to manage, and this is influenced by how fast the economy grows, how many people have jobs, returns from capital markets and whether money is being saved or taken out of SA.
One of the biggest pools is pensions, which has systematically seen outflows, with overall growth being dependent on market returns.
The cost of running firms is outstripping inflation as a result of rising employment costs, while rand/dollar weakness means technology costs increase more.
A report by professional services firm Deloitte shows that total AUM allocated to offshore solutions grew from 6% in 2012, to 15% in 2022, which indicates a growing preference for global asset diversification by clients.
Glenn Silverman, a strategist at investment consultant firm RisCura, said the local asset management industry is a fiercely competitive one, with many new players having entered a shrinking market, making the task of acquiring assets, as well as maintaining fees, even more challenging.
“Larger asset managers are likely to enjoy the advantage of a stronger balance sheet when compared to smaller managers, and hence more likely to be able to survive the more challenging times,” Silverman said.
Companies in the asset management industry are finding it more and more difficult to distinguish themselves in the market amid the high levels of competition and perceived homogeneity of products.
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