Fifteen years ago there were 537 unit trusts available in South Africa. Today, investors have a choice of more than 1 600.
Smaller asset managers are behind much of this growth. Boutique and independent firms have significantly changed the market landscape in South Africa, bringing a new level of competition to the industry.
Their success is also clearly reflected in the finalists of the 2020 Morningstar Awards. Since the awards were first presented in 2010, one of the following firms has always won at least one of the categories for best fund house: Allan Gray, Coronation, Prudential or Nedgroup Investments.
This year, none of those four was even a finalist.
“Over the last five years, I think boutique managers have really come to the fore in terms of performance,” says Mel Meltzer, director of Platinum Portfolios. “Clients have also become much more comfortable dealing with boutiques. Twenty years ago, there was a real reticence on behalf of investors to deal with managers like us.”
The performance these smaller managers have delivered and the track records they have now established is undoubtedly a big part of that. However, investors are also becoming more astute in how they evaluate what is available to them.
“Investors have realised that boutique managers very often have many years of experience and that that is what is really important for a fund manager,” says Charolyn Pedlar, director at Platinum Portfolios. “It’s no longer just about only considering the big brands.”
Smaller firms have also impacted the industry in more subtle ways. Since their investment teams are not as large as in some of the established firms, they are able to develop new professionals more quickly, and therefore play a significant role in the transformation of the sector.
“Talented young black graduates struggle to get exposure to the actual investment processes at large firms,” says Bradley Anthony, MD of Fairtree Asset Management. “Fairtree’s graduate programme has been focused on fast-tracking these new entrants by giving them direct exposure to various aspects of the investment process.”
The outcomes of this approach have been encouraging.
“Our graduate programme has been effective in taking job seekers from having theoretical knowledge to being positive contributors to the investment team within 12 months,” Anthony says.
Meeting the challenge
There are, however, still particular difficulties that smaller firms have to contend with.
“It is a real challenge for a medium-sized manager like us to get onto the restricted menus of the platforms in the unit trust industry,” says Gavin Wood, chief investment officer at Kagiso Asset Management. “That is sometimes an underappreciated business challenge.”
Fund platforms are the most widely used way for financial advisors to invest their clients into local unit trusts. So funds that are not included on these platforms are not exposed to a huge section of the market.
“If you are one of the top five managers by size, you are on all of the restricted menus and that is where the bulk of assets sit,” says Wood. “It’s very difficult to be selected onto these exclusive venues, even with good performance. These menus are dominated by the funds of the platform’s in-house manager and other already large funds.”
As the industry continues to shift, however, it may be inevitable that more platforms have to recognise the demand for access to funds managed by smaller firms.
“I think boutique managers will continue to grow if they continue to outperform,” says Meltzer.
“In certain areas like balanced funds where you need a wider discipline I think the big managers may continue to command an advantage, but in more specialist areas I think boutiques do offer something compelling.”