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Asset managers on the way up

The companies to watch.

Orapa – In a recent article we looked at which of the smaller unit trust managers are showing convincing signs of growth. Which of them, we asked, might grow into the big players of the future?

It is however also worth looking at which asset managers are already in that transition – the “next tier” if you like. These are fund managers that have already established a reputation in the market and a broader product offering.

They are an interesting group because they find themselves in a compelling competitive position.

“We compete with both small and large managers, because we are small enough to have manoeuvrability and large enough to be taken seriously,” explains chief executive officer of PSG Asset Management Anet Ahern. “We believe that the largest managers are most at risk of losing assets to us as their abilities to take meaningful positions in mid and smaller cap stocks becomes ever more constrained.”

Chief Investment Officer at Kagiso Asset Management, Gavin Wood, takes this point further:

“Given that we are medium-sized and given that the South African equity market is so concentrated in large cap stocks, I would argue strongly that most of our larger competitors have less potential to out-perform in equities,” he says. “Even if we only had equal skill, we have significantly more choice in the stocks we can select and we can take meaningful stakes in small- and medium-sized companies.”

There is little question that in a relatively small market such as the JSE, large fund managers are unable to diversify their equity holdings as well as smaller players can. And this means that there is often something of a “sameness” about the local equity holdings in the funds run by larger companies.

“Size is a relative term,” says the chief investment officer at Foord Asset Management, Dave Foord. “But I have no doubt that being large relative to the investable universe restricts choice and hinders performance.

“In our case, we are not primarily equity managers, we are asset allocators, so that gives us more leeway. And our size has not prevented us from generating good returns for our clients.”

Where all of that leads is that these smaller players have the ability to be distinctly different in what they offer.

“When we formed our business, we wanted to do things differently, to add value to the market,” says 27four’s managing director Fatima Vawda. “We feel that some asset managers have a lot of products just for the sake of it, but while it’s one thing to have a product, it’s another to identify the relevance of that product to the end-user.

“So we identified a few areas where we felt there was a need for certain products and nobody else was offering them. Shari’ah compliance was one of those areas where we felt South Africa was behind its global peers. So we launched a suite of products that were a lot more innovative, and a lot more relevant. Today, our Shari’ah funds are all top performers because we took the step to do things differently. Our Africa fund of funds is another example.” 

Offering products that are not only relevant but also deliver performance is what makes these fund managers stand out. It also informs how they see their futures.

“We clearly have a big desire to grow and be a well-recognised and well-respected brand in the market,” says Cadiz Asset Management’s deputy chief executive offer Evan Jones. “But we don’t have a desire to emulate anyone else. We want to position ourselves as a strong brand in our own right rather than in direct reference to anyone.

“All the big guys have done specific things that are unique to them and are interesting for us to look at. But we wouldn’t style ourselves on anyone.”

As Kagiso’s Wood argues, this may mean maintaining some of the essence of a smaller manager.

“Culturally, we want to remain a small company,” he says. “We believe that the best results come from smaller companies and smaller teams where decision making is quicker and there are not institutional or structural demands that dilute your core focus. The best talent also tends to prefer to work in smaller, more dynamic environments where their impact is more apparently felt.

“We’ve definitely felt the strains of being bigger than we were before, but we place a great deal of emphasis on retaining our smaller-company culture. We know that at some point we need to say that enough equities is enough – and that is somewhere around R100bn.”

This is of course a challenge that all smaller managers need to address at some stage – how they maintain their distinctive positioning while growing their assets under management and potentially also their product range. If they don’t want to lose the advantages that being smaller affords them, they effectively have to cap their growth.

However, there is little question about their desire to strengthen their position in the industry, even against the huge marketing budgets of the top tier players.

“We cannot compete with budget, airport ads and big TV productions, but we are very focussed and we’d like to think we are a little hungrier for assets,” says PSG Asset Management’s Ahern. “It is tough out there, but we know that the same inflow for us has a much bigger impact than for them and, looking at the latest ASISA statistics, it would appear that investors are ready for a handing over of the baton to the next generation of asset managers. 

“We believe that at some stage the intelligent investor will look at the big guys and how they got there and start to ask themselves which companies are around now that look like the successful companies of the past.”

For more, visit Moneyweb’s Click-a-unit trust/ETF tool.

 

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