Over the last decade the amount of money invested in South African multi-asset high equity funds, or balanced funds, has grown from around R50 billion to more than R510 billion. This is now comfortably the largest unit trust category in the country.
Over this period the number of balanced unit trusts available to local investors has also shot up – from 70 to 233. Yet despite this proliferation of new portfolios, the largest funds have actually become more dominant.
According to investment firm Corion Capital, the five largest balanced funds accounted for 58% of all assets in this category 10 years ago. They now manage 68%.
“The South African investment landscape has been dominated by these big asset managers due to a combination of factors,” says Corion Capital CIO David Bacher. “Over the last 15 years, the likes of Allan Gray, Coronation and Investec have all been top decile performers. They also have the largest marketing spend and the biggest distribution.”
The big getting bigger
The Allan Gray Balanced Fund is the best illustration of this. It has grown from R23 billion 10 years ago to over R150 billion today. As the video below illustrates, its position as the largest unit trust in this category has been unchallenged, even as the rest of the top five have vacillated.
Source: Corion Capital
While this may be interesting, a better question is whether it is meaningful. Does it matter that there is such a concentration in large funds?
“The pros are that generally people find safety in the well-known brands,” Bacher says. “They understand what they are investing in, and are less likely to get large variability of investment returns.
“The cons are that the bigger you are relative to the industry you invest in, the harder it is to implement your best investment view,” he adds. “And that, in my opinion, is a significant weakness. The other factor is market economics. The more competition there is, the better it generally is for the end consumer in terms of pricing and innovation.”
How things have changed
It is therefore worth reflecting on how different the industry was at the turn of the century. Then the large life assurers like Old Mutual, Sanlam and Liberty dominated the unit trust market. However, they have since given way to independent managers like Allan Gray, Coronation and Foord. So could something similar happen again?
“I think there is opportunity for smaller managers, and you are seeing a bit of evidence of how they are able to outperform,” says Bacher. “You are starting to see the next tier of players like Laurium, Mazi Capital, Fairtree, 36One, Visio and Truffle growing.”
However, while these managers are delivering on performance, they remain at a significant disadvantage when it comes to marketing budgets and distribution. Investors therefore remain more likely to select an established manager.
This is not because investors have a particular issue with investing in smaller funds. The barrier is the lack of familiarity.
“We’ve seen this even in the context of large overseas funds that South Africans don’t know,” explains Warren Ingram, executive director at Galileo Capital. “Four to five years ago we started putting some of our clients’ money into Fundsmiths funds, which are extremely well known and established overseas, but relatively unknown here. We had to have some very lengthy conversations with clients to explain why this should represent even a small portion of their overseas assets.”
Comfort in the big brands
The sense of security investors have in investing with larger managers is not unfounded. There is likely to be far better long-term transfer of knowledge in a big investment team, they should be more efficient in managing costs, and the businesses themselves are more stable.
It’s also worth appreciating that the overall risk to financial advisors is lower when selecting recognised brands.
“If you are an advisor working in a big business, you are not going to get fired for choosing one of the big funds, even if they are underperforming,” Ingram argues. “And if you are an independent in a smaller business and you end up at the FAIS Ombud and have to defend your advice, there is not much risk in choosing one of the large managers.”
This means that even though there is a tier of smaller managers that have become competitive in terms of returns, it’s debatable whether that is enough for them to be truly disruptive.
The passive revolution
Both Ingram and Craig Gradidge, executive director at Gradidge-Mahura Investments, believe that the more likely disruption will come from balanced index funds.
“I think if there is a sustainable threat, it’s probably from the passive side, because the value proposition is fees, not performance, and they are delivering on that,” says Gradidge. “I think it’s already gathering legs in that you see some of the traditional active managers starting passive boutiques and offering passive funds because they see that there is appetite in the retail space.”
This does not mean that they expect passive funds to force active managers out of the market. Their expectation is rather that more and more investors and advisors will use them to complement each other.
“We’ve used the Satrix Balanced Fund pretty much from day one, and it’s now the starting point for building any kind of growth portfolio for a client,” says Gradidge.
Ingram says he is likely to give much more attention to balanced index funds than to managers launching new active balanced portfolios.
“I’m very comfortable using established managers in active space, with viable, low-cost passives,” he says. “I think the two together work well.”