CAPE TOWN – The asset management industry in South Africa has boomed over the last ten years. Markets have generated excellent returns, changing regulations have opened up new investment opportunities, and significant inflows of foreign money have come into South African funds.
But these good times are not going to last forever and the industry knows that. It is growing increasingly aware of some serious challenges and opportunities that will force the industry to re-imagine the way it operates over the next decade.
Here are eight of them:
1. Population longevity
Around the world, people are living and working for longer. This means that traditional asset management models about when people retire and how long they are retired for will have to be reviewed.
“My view is that the theme of people living longer will have a big impact on the industry,” says Nersan Naidoo, chief executive of Sanlam Investments Core. “People will have longer investment horizons and so I expect there will be a move toward solution-based investing rather than products with fixed benchmarks. That will make these products more relevant over the long term.”
2. Changing demographics
For the most part, the asset management industry in South Africa has served a very narrow demographic. That is rapidly changing.
The client base is becoming broader, more culturally diverse, and far more interested in tech-based solutions. Many of them are alienated by the way the industry currently operates and are looking for solutions that are more personalised and immediate.
“Young graduates who are beginning their professional careers tend to research investment and retirement options all online and on their own,” says the managing director of 27Four Investment Managers Fatima Vawda. “They know what they want.”
And the industry has to adapt to give that to them in the form they want it.
“This speaks to the broader theme of how the industry needs to become more client-centric,” Naidoo says. “You need to take cognisance of how different parts of the population want to interact with you and be able to listen to clients through a variety of channels, and take that info and turn it into solutions relevant for those clients’ needs.”
3. The mass market
Perhaps the biggest opportunity for the local asset management industry lies in the mass market. All of the major banks and insurers in South Africa now offer low-cost products for low income earners, but asset managers have done little to attract this sector of the population.
“The industry needs a compelling, low-cost product where someone can begin their investment journey, so that over time they can build up capital and move into more sophisticated products,” says Devin Shutte, CEO of Regenesys Investments. “At the moment, the entry price is just prohibitive. For most unit trusts, the minimum monthly contribution is between R500 and R1 000, and that’s not affordable to the man on the street considering that the average South African’s monthly salary is around R3 000.”
Increasing regulation is impacting on all parts of the financial services industry everywhere in the world. In South Africa, the majority of reform has been positively received as it reinforces the need to protect the client, but it has raised the question of how companies will deal with the added costs associated with compliance.
“We choose to see the changes in regulation as an opportunity rather than a burden,” says Sanlam’s Naidoo. “There are ways that we as an industry can manage costs across the value chain – and that means advisors, platforms, consultants and asset managers.”
Those businesses that are able to do this most effectively will undoubtedly be at an advantage.
The gap that exists between the asset managers and the owners of the assets they manage is a space ripe for disruption.
“The asset manager really needs to know what the asset owner is looking for,” 27Four’s Vawda explains. “But there is a mismatch there, because those two parties do not talk to each other directly. They are dependent on an intermediary, and in most cases that intermediary is not well equipped to play that role.”
The poor quality of many financial advisors has become more and more of a concern, and although time and increased monitoring will weed many of them out, there is undeniably scope for something revolutionary to alter this space.
“Over the next ten years, the overall landscape of the intermediary market has to change,” Naidoo says. “And one of the things we believe will happen is the growth of networks, as advisors look for scale by combining together. I do think that the advisors that will last will be the quality practices that have sustainable businesses.”
There is growing consensus in the industry that the number of products available to investors has ballooned to the point where it is difficult to make an informed selection. There are now over 1 050 collective investment schemes registered in the country, making it very hard for anyone to identify the right options.
“Because of the plethora of choice in the market at the moment, some individuals are almost paralysed,” says Regenesys’ Shutte. “The products and their literature are often too intimidating, with the perverse effect that many people just end up sitting on the sidelines. And that can be devastating for them in the long run.”
If, as is widely expected, investment returns turn lower in the coming years, this will inevitably lead to the closure of funds that don’t offer an attractive value proposition. And at the same time, some larger players have spoken about reducing how many funds they offer to make their product suites simpler and more attractive.
7. Faith-based and socially-responsible investing
There is already growing demand in South Africa for products that comply with Sharia’h principles. And those asset managers that offer these solutions may also be positioning themselves to take advantage of opportunities outside of our borders.
“We are seeing a massive growth in faith-based investing, particularly amongst Muslims,” Vawda says. “And given Africa’s large Muslim population I think this is going to be a big thing throughout the continent.”
At the same time, socially-responsible investing is also gaining traction across the world.
“Especially younger investors in the up-and-coming generation will pay a lot more attention to sustainability,” Naidoo believes. “Environmental, social and governance principles will become a lot more mainstream and part of the investment process rather than a specialist area.”
8. South Africa as part of Africa
As the African growth story continues, South African asset managers are ideally placed not only to take advantage of the greater flows of assets directed towards the continent, but to serve the enormous potential client base north of our borders.
“Historically, people have talked about South Africa and the rest of Africa,” Vawda says, “but that has changed now. People talk about Africa and South Africa as a part of that. And I think that’s exciting.”
“It means that we should embrace being part of this continent and export our asset management skills and intellectual property to the rest of Africa. We need to start generating revenues there, because that’s where the opportunity lies.”