Even though we live in a small economy, SA’s investors have a bafflingly large choice of asset managers wanting to manage our money.
I knew there was an extensive list of more than 40 black-owned asset managers. But according to a study just released by RMI Investment Managers, there are now 126 independent boutique managers running R2.4-trillion of assets. And this excludes all the asset managers attached to banks and life insurers.
Investec Asset Management could be considered either a boutique or a tied business. It is part of a banking group but it has no captive business. RMI, itself part of a banking group, considers Investec a kindred spirit. About half the R2.4-trillion run by boutiques, as RMI defines them, has gone to Allan Gray and Coronation, which may be independent but are more like Makro stores than boutiques.
Other large independents, such as Foord and Prudential, would be more comparable to Stuttafords in size, though rather better businesses.
RMI Investment Managers CEO Chris Meyer says boutique managers manage 47% of the total assets managed in SA, which is comparable to the 45% in the US and 41% in the UK. But the difference comes in the high concentration of the industry, with 10 of the 126 managers accounting for 76% of the assets managed by independents, compared with 46% in the UK.
It is easier for investors, especially beginners, to invest with a firm with a powerful brand and reputation for stability such as Old Mutual and Sanlam. It is like ordering room service at your hotel, which will be acceptable but bland, instead of looking for an independent restaurant run by a passionate innovative chef.
Investors and their advisers increasingly prefer independents; they had four times the net inflow of the bank-or insurance-owned asset managers over the past three years.
Meyer says that over the past five years, in both retail and institutional mandates, the annual return from independents in SA has been two percentage points a year higher than bank-or insurance-owned businesses. And it is not a local peculiarity. Research from US boutique investor AMG (which was the model for Meyer’s operation) shows that boutiques have beaten the large dinosaur managers by 0.51% a year over the last 20 years. And even in the US they have proved to be competitive against index funds, with an average 1.41% annual excess return against their relevant index.
A differentiator to tied firms is that in 69% of independent firms more than 50% of the equity is owned by the investment team, giving them both skin in the game and far more autonomy than their counterparts in the bureaucratic financial conglomerates enjoy.
Even so, it is not clear that the South African investment world can support 126 independents. RMI’s research shows that 65% of these managers run less than R5bn. Meyer says a firm needs at least R5bn to be profitable and for the firm to be taken seriously. The threshold is lower for a hedge fund manager, as it enjoys much higher performance fees.
Peregrine Capital is highly profitable, with about R8.5bn under management, for example. A quarter of the independent managers are predominantly focused on hedge funds. And within their ecosystem most of them can make a good living.
The same can’t be true of the black economic empowerment (BEE) managers. With a few exceptions — such as Taquanta, Kagiso, Mazi and First Avenue — too many of them are subscale, and they virtually all rely on the institutional market, with very limited penetration of retail investors. BEE managers account for 29% of the managers by number but just 16% of the R2.4-trillion in assets.
In the recent past the dominant independent fund managers were the FICA quartet: Foord, Investec, Coronation and Allan Gray. Before Foord joined the group, the incumbents were simply called "the CIA". All remain high quality. In fact, the CIA runs most of the money for the pension fund where I sit as a trustee. But it is a dynamic industry. The rolling 12-month net unit trust flows into FICA have fallen from R50bn in mid-2014 to R10bn today. Coronation’s net R18bn outflow wouldn’t have helped.
More recently there has been a flow into the group Meyer calls the Contenders. No doubt most asset managers will echo Marlon Brando’s famous line, "I could have been a contender." This grouping includes Nedgroup, which is bank-owned but its underlying asset managers such as Abax, Truffle, Taquanta and Electus certainly aren’t. Prudential, which really belongs in the FICA group (PACIF?), is also in the group.
In the recent past the dominant independent fund managers were the Fica quartet: Foord, Investec, Coronation and Allan Gray
— dominant independent fund managers
Meyer has elevated PSG to this elite contender group and it is ripe for promotion to the premier league. In less than four years under Anet Ahern’s charismatic leadership it has grown from R8bn to R30bn under management.
The Contenders are getting higher flows than FICA, of about R20bn/year, though this is down from R40bn a year ago. The big flows are now going to the Challengers, which had net inflows for R70bn over the past 12 months. This grouping includes the genuine boutiques, such as Visio, Truffle, 36One, Prescient and Rezco.
Of course RMI has a vested interest in promoting boutique managers as it has strategic holdings in eight asset managers, of which Truffle is by far the largest. It is also the only one of the eight with a strong retail franchise. Others will follow,
Perpetua, run by the high-profile Delphine Govender, will start to appear on short lists, particularly after the performance of its value-oriented funds has recovered. CoreShares, another RMI affiliate, has a growing selection of index funds licensed from S&P and might be a good choice for investors who can’t stomach the more creative cooking served up by the active managers.
And RMI is doing its bit to promote BEE managers both directly (Perpetua and Sentio) and through its joint venture with Royal Bafokeng, simply known as Royal.
Royal made its first investment recently into Sesfikile Capital, a listed property specialist which has a well-established unit trust.
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