After buying stakes in various independent boutique asset managers over the last three years, RMI Investment Managers (RMI IM) is entering a new phase: building scale.
The firm, a wholly-owned subsidiary of JSE-listed RMI Holdings, now has stakes in 11 affiliates spanning most asset classes. The affiliates managed a combined R105 billion at the end of June 2018, down from roughly R106 billion by end-2017.
Unlike most local asset managers, RMI IM doesn’t manage money itself, but takes up minority stakes in independent boutiques with an entrepreneurial, owner-manager culture. Its hypothesis is that the business model is more sustainable where a strong equity ownership is present than when people are only incentivised as employees through bonus structures.
Many of South Africa’s well-known asset managers were built by entrepreneurs who left their employers to start their own firms. Prior to joining Investec, Hendrik du Toit worked for Old Mutual. RECM’s Piet Viljoen was at Investec while Coronation’s founders left Syfrets to set up their own shop. It is this philosophy that has informed RMI IM’s investments in boutiques like Perpetua, Tantalum, Granate, Sentio and Truffle.
CEO Alida de Swardt says in terms of its asset allocation mix, the firm is satisfied with its current investments. It is now playing in all money pools in the local market, but still wants to diversify and grow its earnings so that its investments will generate significant revenue in the longer term under various market circumstances.
“We are not there in terms of that yet – some of our affiliates are still young, early start-ups and they need to still grow and develop scale. I think we’ve got the right base now to grow from, but there is still a lot that we need to achieve.”
Its current portfolio is skewed towards equity at around 40% of assets under management (AUM), followed closely by listed property and multi-asset at 18% and 17% respectively. Client appetite is arguably better in the multi-asset arena, with around 43% of collective investment scheme assets invested in this space. After the global financial crisis, there has been a growing preference for multi-asset portfolios where asset allocation decisions are “outsourced” to fund managers.
As the firm is quite intrigued by how machine learning and Artificial Intelligence will disrupt the industry, there may be possibilities to expand in the quantitative space. ESG (environmental, social and governance) is also an area in which it doesn’t compete, even though the investment trend is getting a lot of global airtime.
“There’s some niche alternative areas that I think we probably can consider. We are not in a rush however. We’ve got a well-established and diversified portfolio. Now it is actually about demonstrating that our business model is one that can work by helping our affiliates to grow and reach scale.”
While it will be opportunistic with further investments, it is not actively looking to add to the portfolio.
One of the clear gaps in its portfolio is its global offering.
“We don’t really have a strong global offering just yet. We’ve got some of our local affiliates that have entered the global arena by starting global equity funds, but it is still early days,” De Swardt says.
There is a lot of money leaving South Africa looking for growth offshore and capturing some of that through a local trusted player may be a strategy it will consider in future, she adds.
“I do however think in the longer run, if we want to create some kind of earnings diversification for ourselves through hard currency revenue, we will probably have to look at an [direct] offshore player.”
Although its former CEO Chris Meyer previously indicated that the firm wants to take on the likes of Coronation, suggesting that affiliates would have to grow their assets more than fivefold (Coronation had R588 billion of AUM at March 31, 2018), De Swardt says it has not set a specific AUM target, but is taking a long-term view. It does however have a “pretty strong” three-year view of what it believes its affiliates can achieve.
As is the case for many up-and-coming black firms, it can be tough to attract significant assets, particularly from retail investors who tend to stick with large, well-known brands.
Arguably, the biggest challenge is not to churn the same pot of money between various firms, but rather to attract new money into the system.
“From a retail strategy point of view, we want to chip away as we’ve got to be very long term in our thinking there, whereas in the institutional space, we’ve seen some pension fund asset consultants giving allocations to our portfolio managers because they [have come to] know them well over the years.”
Ultimately, growing assets and building profitable businesses are part of the outcome and simply increasing AUM shouldn’t be the primary goal, De Swardt says.
“It is very easy to just ramp up AUM by [acquiring] non-profitable business. We’ve seen a lot of examples in the past where people did that. It is not a sustainable way of building a business. We don’t have AUM targets that we try and hunt down at any cost at all. It is more about taking a ten-year journey.”
Yet, building an asset management business in the current environment – where the FTSE/JSE All Share Index has largely moved sideways over the past three years – is tough.
In its interim results ending December 31, RMI Holdings described its subsidiary’s financial performance as “slightly behind expectations”. Profitability was negatively affected by additional investments required to ensure scalability and the impact of weak markets.
De Swardt says the firm is fortunate to be part of a group that takes very long-term investment views.
“It has not been an easy environment, but… our group is not about trying to time our transactions with the market but rather to help build long-term sustainable businesses through the cycle.”