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The role of asset managers in the Covid-19 crisis

What positive impact can the industry have?
The livelihoods of millions of people will be affected by the decisions made in the coming months. Image: Reuters/Mike Hutchings

There can be no question that South Africa’s economy is going to be hurt by the country’s approach to dealing with the Covid-19 pandemic. What is not known is just how severe the impact will be.

Read: Surviving lockdown

Closing mines, factories and shops for weeks is an unprecedented step. And it will require an unprecedented response to get the economy back on its feet once this period is over.

As Hendrik du Toit, CEO of Ninety One (previously Investec Asset Management) says, the private and public sectors will need to combine their efforts and resources the way they would in a time of war.

“This should not just be a case for state intervention,” Du Toit says. “It should but be about combined action between various constituencies in society.”

Read: SA’s response to Covid-19 should be war-like

As significant allocators of capital, the local asset management industry must have a significant role to play. There are two areas in which it can make its influence most felt.

The message

The first is to support investors – its clients – and help them to navigate the immediate market crisis.

“As asset managers a big role we can play is to educate people during periods of systemic risk that this is a long-term game and short-term blips do happen,” says Fatima Vawda, MD of the 27four Group of Companies. “And they will keep happening.”

She believes the industry has a significant role in getting this message to investors. However, it’s not clear that this is happening clearly or consistently enough.

“I’m really disappointed,” says Vawda. “I think the asset management industry must do a lot more when it comes to consumer education.

“We don’t do enough, and we need to communicate better.”

It is particularly critical at times like this, when investors are stressed and susceptible to making decisions based on short-term events instead of seeing things in context of their long-term plan.

“We need to communicate clearly, cogently and consistently so that people can make well-informed decisions,” says Khaya Gobodo, MD of the Old Mutual Investment Group. “The most dangerous thing anyone can do is to make a fear-driven decision that could permanently impair their ability to meet their long-term goals.”

Making life easier

Part of getting this message across is creating the right incentives for investors, encouraging them towards better decisions. One possibility is to offer temporary fee reductions or a fee holiday, which might influence clients to stay invested.

However, this is could be difficult for asset managers to implement since they do not maintain balance sheets that could support them if they don’t collect fees. It also wouldn’t actually be putting any money in clients’ pockets.

“I think what is more important is to look at those products where investors are paying monthly premiums, and how we create a bridge for clients so that they don’t have to make those monthly contributions but can still maintain their exposure, without penalties,” Gobodo says.

This would be relevant for products like retirement annuities, where clients may be bound to making monthly payments or risk losing some benefits.

“This is a plan we are working on,” says Gobodo. “It could make a big difference to disposable incomes to provide a premium holiday while keeping clients whole.”

The markets

In the broader economy, asset managers have a responsibility towards the financial markets in which they operate.

“The president spoke about the JSE as essential when he announced the lockdown, but that was a broad statement,” Vawda points out. “The JSE on its own can’t exist. It needs investors.”

In other words, asset managers have to be cognisant not just of the short-term imperatives of looking after their clients’ money, but of the broader necessity of keeping markets functioning.

“In a time like this, liquidity is probably one of the most important resources,” Gobodo points out. “If we get into a liquidity crunch, that gets transmitted very quickly into the real economy.

“Maintaining liquid markets in the financial system is so important.”

Asset managers have two roles to play here.

“The first is engaging the industry and various authorities – such as the Reserve Bank and National Treasury – to make sure that we are all aligned about the need for liquidity and how to provide it,” says Gobodo. “The second is being constructive participants in ensuring that liquidity remains available.”

This means both being able to ensure that there is money to pay to clients making withdrawals, but also keeping liquidity in the wider economy, for instance through the corporate bond market.

“If we all pulled that liquidity because we wanted to keep it in cash, that could be catastrophic,” says Gobodo. “A liquidity issue for corporates can very quickly become a solvency issue, which could be permanent.”

The aftermath

Asset managers also have to think about their role in allocating capital in a way that promotes a sustainable economic path once the Covid-19 crisis fades.

“As custodians of savers’ money, it is the role of investment managers to allocate capital to companies with long-term, sustainable business models,” argues Schroders CEO Peter Harrison.

“The livelihoods of millions of people will be affected by how we act in the coming months,” he adds. “I see it as our role to reject short-term opportunists who are seeking to capitalise on price distress.

“Companies with strong long-term prospects should be supported.”

Asset managers should also be prepared to engage with the businesses they invest in to encourage responsible corporate behaviour.

“As representatives of asset owners, it is incumbent on us to ensure, for example, that well-intentioned help secures the future of employees rather than executives,” says Harrison. “The companies receiving support must demonstrate the strength of their social contract with stakeholders.

“If investors are demonstrating flexibility, company executives should do the same in how they treat employees, suppliers and customers alike,” he says. “We will be watching closely and actively engaging where necessary.”

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Best Patrick, I hope you will see this note.
If ever there was good reason for the investment industry and Moneyweb to pressure Treasury to amend the very restrictive practise prescription on amendments to pension income withdrawals from living annuities (of once a year only), now is that time.
As all should realise, prevailing conditions necessitate revising one’s pension income from living annuities – whether to counteract the decimated fall-out effect of the thereby market and to guard the capital balance or otherwise even so as to buy into the dip with additional income to similarly recoup the crazy losses when the market hopefully rebound somewhere in the future.
On this topic, it will be a good thing if you run an article on the effect of the market crash on retirement savings, why one should address a rebound of growth assets before exiting your current underlying investment funds of your retirement fund and position your portfolio more aligned towards generating a pension income, as well as on the importance of reconsidering your retirement date if it was one’s plan to retire in the near future.
Thanks mate.

Asset managers are paid to manage the risk of the portfolios/mandates that they are given by clients. Full stop.

There are plenty of other functionaries such as market makers, brokers, institutional capital, financial advisers etc who play their respective roles – be it liquidity or providing financial advice/knowledge. Hence we call it a market.

End of comments.

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