Analysts expect more consolidation in the local asset management industry as companies look for growth with a broader product mix amid increased competition from passive funds such as exchange traded funds.
This comes after insurer Sanlam and banking group Absa announced on Tuesday the merger of their investment management businesses to create a company with assets under management of more than R1-trillion, second after Ninety One.
The transaction will see Absa exchange its investment management business, Absa Investments, for a stake of up to 17.5% in Sanlam Investment Holdings (SIH).
Warwick Bam, Avior Capital Markets head of research, says he expects similar deals given that the investment management industry is likely to consolidate over the next several years due to the maturity of SA's savings industry.
He explains that this leads to limited growth opportunities for a large player.
"Organic growth through increased market share is always possible but it takes several years to achieve as consistent investment performance must be matched by strong distribution capabilities," he says.
Mergers and acquisitions in the asset management and wealth industries globally are an ongoing trend as companies look to offer comprehensive products to clients and cut costs.
Cornelius Zeeman, portfolio manager at Fairtree Investment and Asset Management, says consolidation in the asset management industry makes sense because scale is important.
"Regulation and lacklustre markets have accelerated this trend over the last few years. Further deals/partnerships will therefore continue to happen, but maybe not at this scale."
Jan Meintjes, portfolio manager at Denker Capital, says consolidation in the industry is very attractive to combat continued fee pressure. Asset management is a hugely scalable business as the bulk of the costs are normally fixed and by adding revenue (or assets under management) "you get fantastic operational leverage as most of the revenue falls through to the bottom line".
This is also true when you have to upgrade systems on the investment platform. So the combined company will only have to spend on one platform, leading to increased efficiency. The benefit to clients should be lower fees as some of the operational leverage can be passed on to clients, "but sadly this seldom happens in the real world".
"What can happen is that the combined entity would be more inclined to spend some of the operational leverage benefits on system and product enhancements that can lead to better service levels and better products over the medium term . this is the real benefit to clients over time," Meintjes says.
The market has changed considerably over the past few decades.
David Shapiro, chief global equity strategist at Sasfin Securities, says that 30 to 40 years ago, when Sanlam and Old Mutual were dominant forces in the asset management industry: "If neither of the big ones dealt with you as a broker, you were doomed to starve." This changed in the '90s with the emergence of Coronation, Investec, BoE and others, which began to attract clients such as the Public Investment Corporation and Transnet away from the big insurers.
"Absa was never in the game in any big way. It never had the big insurance base to give it critical mass. It has been a decent player but never a challenge to the other larger asset managers. So it made sense for them to give up this part of the market," he says.
The institutional side, with clients such as pension funds, mutual funds and money managers, requires major resources. "Without an army of sales people out there selling your product you don't stand a chance. Your costs are also prohibitive - from compliance to research.
"Compliance is a killer - exhausting and costly. Returns are also shrinking as competition in this area of the market steps up. Also, in the South African market it is very difficult to differentiate yourself.
"I think you will see similar deals - maybe not as big but certainly among the fringe players," he says.
Absa and Sanlam say clients of the combined SIH will benefit from access to a wider range of investment solutions to meet their financial needs, and increased investment in research and technology will equip SIH with the data and systems to strengthen its industry leadership.
The combination of SIH with Absa Investments will strengthen SIH's position as one of SA's largest black-owned asset managers, the companies say.
SIH subsidiary Satrix, which provides index tracking, will also buy Absa's exchange traded funds (ETF) business, excluding the commodity ETF business.Absa will sell its linked investment services provider (LISP) business to Glacier by Sanlam, and Absa will enter into a 10-year distribution agreement with SIH, which significantly broadens market reach for the enlarged SIH, the companies say.
Farai Mapfinya, CEO and chief investment officer at Aequalis Asset Managers, says the deal is positive in terms of gaining scale to cushion the pressure on management fees, basically sacrificing price for volume.
"It does introduce some uneasiness and a level of discomfort in the workforce. A lot of teams will need merging, especially the investment team. "On the traditional institutional business we didn't see scale as an issue, the key rationale and benefit are simply the empowerment credentials."
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