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‘I have never seen an asset management merger which has worked’

In the first in a series of perspectives from people who have seen the South African investment management industry develop over the past 25 years or more, we speak to former Electus head Neil Brown.
Non-executive director of Coronation Fund Managers, Neil Brown. Image: Supplied

From his current vantage point as a non-executive director of Coronation Fund Managers, Neil Brown makes what might seem an obvious point – that all successful asset managers need to be investment led.

‘Significant staff ownership, both financially and in the investment process, is essential,’ he told Citywire South Africa in an interview.

But, he said, it isn’t a given. In his career, which has spanned bank-owned houses such as NIB, life-owned Old Mutual Asset Management (Omam), and Quaystone, a three-way split between Mutual, Nedbank and black economic empowerment firm AKA Capital – shareholder considerations have been the main concern.

‘Leon Campher, the founder of Coronation, realised that fund managers needed direct ownership of their business, and this was a hallmark of Coronation after the team walked out of institutional fund manager Syfrets Managed Assets in 1993,’ Brown said, ‘In my experience, life offices and banks who own asset managers are reluctant to empower their teams in this way.’

Brown witnessed Campher’s walkout from his perch at sister company Syfrets Private Bank.

Syfrets’ controlling shareholder, Nedcor (now Nedbank), did not learn its lesson. Brown was drafted into Syfrets Managed Assets to prop it up after the walkout, but even then Nedcor refused to grant equity to staff. It recruited talented fund managers such as Anet Ahern, Tim Allsop, Guy Woolford and Walter Aylett, but none stayed long.

Brown joined Omam after the collapse of Quaystone in 2004. He had never resigned since he joined Syfrets in 1990, but saw that business merge with UAL to form Nedcor Investment Bank – which later was collapsed into an ill-fated joint venture with Franklin Templeton – and then merged into BoE Asset Management. This had been one of the darling startups of the early 1990s along with Investec Asset Management, Coronation itself and Prudential.

‘I have never seen an asset management merger which has worked,’ Brown said. ‘There are just too many subtleties when it comes to corporate culture and investment philosophy. And fund managers, by nature, are difficult people. They don’t like bureaucracy and they don’t like complexity.’

Making economic sense

As well as mergers, Brown witnessed an attempted demerger when Old Mutual Investments split into a dozen separate boutiques in 2007. Brown and his longtime investment partner Richard Hasson, aimed to run their own boutique, Electus, as one of those independent businesses focused on attracting enough alpha to attract third-party assets.

The Electus boutique won 14 third-party mandates from 2008 to 2013, including funds from Norges (the Norwegian Central Bank) and the PIC. Electus’s flagship unit trust portfolio, the Nedgroup Growth fund, already had far more of a small- and mid-cap bias than the typical equity fund.

‘We were lucky to be given direct equity ownership, unlike many of the other Old Mutual equity boutiques. We also had a mandate to run distinctive specialist equity portfolios.’

But Old Mutual lost faith in the boutique model after 2015 and reconsolidated its boutiques under the Old Mutual brand; Brown and Hasson were given the option of either closing down or starting an independent Electus without Old Mutual’s backing. Electus’s closure in mid-2020 is one of the rare instances in which a South African asset manager has closed down altogether.

‘We accepted that with barely R2bn under management, the business did not make economic sense,’ said Brown.

But if Old Mutual had taken a longer-term perspective and kept, say, a 49% holding, Electus could have prospered in the recent revival of SA inc. shares on the JSE.

‘Some of our larger holdings such as HCI, Mustek, Texton and CMH have bounced back very strongly since we closed.’

Brown was appointed as a non-executive director of Coronation Fund Managers when he retired from the industry in 2020. He also sits on its remuneration committee.

‘I can’t obviously tell you what every employee earns, but it is clearly stated in CFM’s pre-listing documents that the remuneration pool makes up 30% of pre-tax profit. Fixed salaries remain low by industry standards. Coronation has annual staff turnover of 6% to 7% so it must be doing something right.’

Yet too many asset managers just linger on in South Africa he believes, many barely making a living.

‘The business doesn’t require much capital, though there needs to be spending in IT, in disaster recovery and systems such as Bloomberg or FactSet, to be taken seriously by asset consultants.

‘But there is no doubt that there are too many managers in an industry which isn’t growing. Employment in the country is shrinking and much of the wealth that there is in the country is going offshore,’ he said.

Stephen Cranston is a journalist at Citywire, which provides insights and information for professional investors globally.

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

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Ninety One would disprove the theory that investment managers must be major shareholders. Ninety One was Investec business unit for probably 25y or so, and did incredibly well, now a stand-alone listing.

Coronation managers’ disaster with Steinhoff shows that you shouldn’t believe your own PR (whether investing your own or client funds).

Many outfits shine and then fizzle like Coronation has for its shareholders. AllanGray also for example.

End of comments.

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