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Fund managers without international capabilities may struggle

The SA investment universe, particularly equities, has shrunk tremendously: Coronation co-founder Thys du Toit.
Image: Moneyweb

Earlier this year market information service TimBukOne noted that the number of listed companies on the JSE has fallen 40% since its peak. In 2001, there were 601 stocks listed on the local exchange. That has fallen to 344.

Source: TimBukOne (click to enlarge)

Thys du Toit, one of the founders of Coronation Fund Managers and currently chairman of Rootstock Asset Management, believes that this has profound implications for asset managers.

‘The asset management industry is only as strong as the investment universe,’ he said during an event this week hosted by The Collaborative Exchange. ‘And the South African investment universe, particularly from and equity point of view, has shrunk tremendously.’

He made the point that, excluding Naspers, the total market capitalisation of the remaining stocks on the JSE is less than $1tn. That is smaller than any of the three largest companies in the US – Microsoft, Amazon or Alphabet.

Opportunity set

‘We now have so few investment opportunities that the fund manager that is only going to look at domestic equities, I believe, is dead,’ said Du Toit. ‘Unless you build capacity to be able to manage money internationally, you are going to have a difficult job.’

This is, however, hardly a simple proposition, for two reasons. The first is that a growing number of international asset managers, with global experience and reach, are establishing a presence in South Africa. The second is the rise of passive investing.

‘You need to compete with these international names,’ said Du Toit. ‘And to beat them you have to do something unique. A guy like Dawid Krige with his China fund is the route to go for a smaller business. He has found himself a niche where he is the expert.’

Krige is the founder of Cederberg Capital, which specialises in Greater Chinese equities.

‘Indexation is another big issue,’ said Du Toit. ‘I think there is a big place for that. And if you want to charge the fees that all of us are charging, then you need to be able to add value. If you can’t add value, you are dead.’

Compliance burden

Du Toit believes that the reduction in the number of listed companies in South Africa has a lot to do with increased regulation.

‘We don’t have new listings any more because the red tape that you are caught up in when you sit on the board of listed company is enormous,’ said Du Toit. ‘So people don’t want to be listed any more because instead of being involved in strategic planning you are caught up in red tape.’

Du Toit is currently a non-executive director at Old Mutual, and has served on the boards of Coronation, PSG Group, Attacq, Pioneer Food Group and ZCI.

This burden of compliance is also a substantial challenge to the asset management industry. Guy Toms, the co-founder of Prescient Investment Management, noted that when they launched the business in 1998 all they required was a one-page certificate from the South African Reserve Bank.

‘That was it. There was no such thing as a compliance officer,’ Toms said. ‘But what we have seen in the last 20 years is a huge increase in regulation and compliance. We now employ four compliance officers and two lawyers. The amount of regulation and compliance is daunting, and I can see that that trend will continue.’

He expects that regulation of asset managers will increasingly align with that of banks.

‘The banks are exceptionally well regulated and I think there will be a big push to regulate asset managers as well,’ said Toms. ‘If you look at some of these big international funds, they have excessive leverage and don’t have to hold capital against that, whereas banks do.

‘I think it will become a much more rigid environment to work in,’ he added. ‘We won’t have the flexibility that we have been used to.’

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Most SA fund managers have ambitions of taking on the world (and to earn more fees).

Ninety One, Old Mut etc have established global equity franchises.

Certain boutiques such as Perpetua, Meago also have niche and market-differing global products.

Africa (ex SA) has proven to be shocking for most.

“Most SA fund managers have ambitions of taking on the world (and to earn more fees)”. Where do you get this from in terms of ‘ambitions of taking on the world’? I see you mention Perpetua (again)! The Perpetua Global Equity fund seems like a standard global equity fund to me. How is it market-differing?

Perpetua differentiates itself in the creation of wholesale amounts of negative alpha! Since inception the fund is down over 17% while the market is positive 2,3%.

So if you want to lose money-at a high cost-invest with them!

To call them clueless would be complimentary!

My apologies. I missed the minus sign.

They will struggle…

Many BEE managers are lining up for the new CIO at PIC to be named, and a clear strategy, if the PIC hives off to the BEE managers , many will double their asset base quickly and have decent profitability for the Senior staff. Many others that cant diversify or wont diversify will be stuck in the middle businessess with little growth prospects. The consolidation of RECM, Counterpoint, the closure of Electus are all signs of the industry having to consolidate, shut capacity down.

The BEE managers have mainly SA biased investment portfolios and as the article states – they may struggle. The example above is testament to how challenging it can be to manage global equity portfolios (-17% vs a market of +3%), or even their worse domestic investment performance.

Eventually, performance has no colour unless you mean SA green (R10) or US dollar green.

Thanks Coleson – referring chief investment officer not chief executive officer.

This is the closest a former institutional asset manager has admitted that South African investors too, who don’t invest offshore in ever-increasing numbers, are also “dead”. As I have been trying to warn over the last nine years or so.
The last decade has been a torrid period for investors in the local market and they have, in dollar terms over a decade (and even in rands over a five year period) become progressively poorer.
Because investment returns are very relative in nature, many investors did not initially experience this “theory of relativity”, but kept on being assured by the rand returns which still tended to trend ever higher. But over the 5 year period even this sleight of hand has been exposed, and now investors (who stuck with their local is lekker-advisors) have the gut-wrenching experience that their investments have shown now growth in rands over 5 years, hardly beat the inflation rate over ten years and in USD terms has shown zero growth, and in over seven years have lost on average 7% PER ANNUM in USD terms.
It’s almost like checking your bank account one morning only to find that your current account has been hacked and that most of your money has been swiped.
Now an increasing number of investors are starting to realise just how poor their “wealth” has become in global terms
Their residential property(-ies) have lost 25% in real terms in rand terms and almost 50% in USD terms. At the same time, the currency has dropped from below R7 in 2013 to R17-odd today.
For the benefit of MW readers who won’t see these tables published elsewhere, here are the numbers:

LOCAL VERSUS OFFSHORE INVESTMENTS: (IN ZAR)

10YRS ALSI 9,1% p.a. MSCI World 17,2% p.a.
5 yrs. ALSI 1,6% p.a. MSCI World 13,7% p.a.
3 yrs ALSI 1,1% p.a. MSCI World 16,1% p.a.
1 yr ALSI -10,8% MSCI World 21,8%

LOCAL VERSUS OFFSHORE (IN USD)

10RS ALSI -,04%p.a MSCI World 6,9% p.a.
5 yrs ALSI -6,8%p.a MSCI World 4,4% p.a.
3 yrs ALSI -9,0% p.a. MSCI World 4,5% p.a.\y
1yr ALSI -30% MSCI World -5%

Please note that I am not even comparing the JSE with the rampant Nasdaq or even the more buoyant S&P500. That would really make some people sick.

The bottom line is that our local market, with the exception of Naspers/Prosus and some gold and platinum counters (whose fortunes are determined mostly offshore) has been reflecting the collapse of the SA economy as result of the ANC’s destructive economic policies.
It is foolhardy and bordering on dishonesty to suggest that the local market is “cheap”, “undervalued” and the “best investment opportunity”amongst emerging markets, as local fund managers tend to do at their presentations.
Thys do Toit’s warning was directed at fund managers. But his message applies equally to ordinary mom and pop investors who tend to place a degree of trust in the advice they receive from their embedded investment advisors and local investment companies. But that trust is running on empty and I expect a floodgate of redemptions in the near future as people lose faith in this jaded message.

Apart from the numeric shock, the JSE is not providing anything exciting for new entrants/investors.

How can anyone be excited about natural resources, telecoms, banks or old fashion retails chains.

Which begs the question – will these Funds survive, especially after your June 13, 2020 Article – How well long vs short hedge funds negotiated the crash.

‘’ This would have been required from market neutral funds most specifically, but the majority of money in local hedge funds is in equity long-short strategies’’
The funds selected by Moneyweb (I assume it was the best performing ones) performed disastrously. How did the ones that didn’t make your list perform – and even the smaller boutique alternative investment houses like the X-Chequer Fund (that has been nominated as top-performing funds in their respective categories on a number of occasions over the decade), etc?

“Right, we need 30% offshore allocation, do we 1. Spend money on upping our offshore research team or 2. Buy the World MSCI”

Not rocket science guys. I mean you can get smart by adding a few smart Beta ETF’s, but don’t really need a whole team.

Suckerfish are those small fish that accompany sharks wherever they go to feed off the scraps left over after the shark ate its prey. The growth that is reported by almost all fund managers is simply the result of credit expansion without an equal rise in prior savings. The growth reported by fund managers has nothing to do with the skills of the manager but results from the skills of the governor of the Federal Reserve, or the Reserve Bank. The governor does all the work and the fund manager pockets the management fees.

Fund managers follow the Reserve Bank like suckerfish follows the shark. Some of these suckerfish gets quite fat in the process. The suckerfish rides on the back of the Reserve Bank and the clients pay to ride on the back of the suckerfish. This is the modern financial industry.

Add to this if I can is that I’m guessing that there is still a massive amount of money coming in every day from retirement and insurance contributions from just about everyone. This money has to find a home and (preferably) show a real return; every day. In a stagnant economy there is limited demand for simply lending out money for business expansion that will show a good return. Easiest is to buy shares, and more shares, repeat.

This is exactly why our Jersey based business has enjoyed growing levels of support by quality independent asset managers since we were awarded our FSCA Category One licence back in 2015 . Providing internationally diversified and risk graded portfolios from 100k per currency (GBP/USD and Euro) at a management fee of 0.50%, and delivering highly competitive performance has ensured strong support. Some of the more enlightened locally based asset managers now partner with us for their international allocations or to manage their offshore funds, recognising it is really tough to do this out of SA… With the offshore investment allowances now open to all, why would one not properly diversify offshore, and with a independent, established, LSE listed firm such as ours, with deep SA knowledge, strong support from SA based independent financial advisors and a regular SA visiting programme in place?( just not at the moment!!)

..but have you heard that the local general equity fund in terms of ASISA classification on long-term basis has whipped the butts of many, especially those ‘the local market is not even a percent of the global market.

https://expert-writers.net service was a life-saver, setting me up with a quality essay that was better than what I could have written myself. Customer support was very responsive with my questions and concerns, and the essay itself was very articulate and met my requests to the letter. I also got the essay well ahead of deadline so there was plenty of time to make revisions, though I didn’t need any. Overall, I was more than happy with Expert-writers service pricing, punctuality, and the quality of their product, and I will definitely be ordering more essays from them in the future.

End of comments.

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