They may be expensive, but no large institution would be seen without one. Life assurers and banks think of asset managers as trophy investments. They use highly paid research and portfolio management staff. Once scale has been achieved - perhaps R20bn later - earnings growth can be quite simple to achieve.
An active portfolio manager that offers the full spectrum of equity, bond and balanced products probably needs about that much money to break even .
Stanlib Asset Management MD Alan Miller says an asset manager's costs should increase in line with inflation. But as the asset base is primarily in equities it should increase in line with the equity risk premium - the extra return investors are paid to hold equities. In the past, that has been about six percentage points ahead of inflation.
But over the past five years, there has been little evidence of this risk premium, either in SA or internationally. According to Alexander Forbes Asset Consultants, there has been a 5,6%/year return from the JSE free float index while core inflation has been 8,7%. Over three years the JSE has provided 2,9% and core inflation has been 9,1%.
International markets have been even worse, so the disillusionment with the asset management industry is even greater.
Investec Asset Management CEO Hendrik du Toit says international markets have damaged the profitability of asset managers in the UK and Europe so much that many of the mother companies are now keen to dispose of their trophy subsidiaries.
Commerzbank, for example, has been looking for a buyer for Jupiter, and Zurich a buyer for Threadneedle.
Du Toit says such disposals are unlikely in SA as most life companies and banks do not run their asset managers on a commercial footing.
In Investec's case the situation is reversed as Investec Asset Management is in far better financial shape than its parent bank and provides more than a third of group earnings.
But Du Toit says it is unhealthy to hang on to subscale asset managers and not permit the consolidation that the industry needs.
Asset managers have rarely been subjected to the type of cost-cutting that has hit, for example, the claims administration department or the branch networks. Many mergers that would have added to the bottom line - as a larger number of assets would have been run with the same cost base - have not taken place.
There was strong speculation after Nedcor took over BoE that there would be a three-way merger between Old Mutual Asset Managers (OMAM), BoE Asset Management and FT NIB Investments, or at least a merger of the latter two outfits.
But OMAM MD Tim Cumming says merging asset managers is not the same as putting three different ice cream lines under one roof.
Cumming says there is no guarantee that the combined entity will be able to maintain the same asset base. Institutional clients are often on a day's notice, and retail clients can move their money to other providers through linked product platforms.
In the end neither the three-way nor the two-way merger took place. FT NIB, which had by far the weakest track record of the three, left the institutional asset management business and now operates purely as a private client manager. Control of BoE Asset Management was sold to a black empowerment consortium, AKA Capital, headed by Eskom chairman Reuel Khoza, and it was renamed Quaystone.
Quaystone MD Anet Ahern says it is difficult to attract assets during a merger process, and FT NIB offered little attraction to Quaystone as its client base was primarily either private clients or nondiscretionary (such as its advisory work for Mutual & Federal).
Ahern says Quaystone, with R17bn under management, has a large enough client base to carry on as a separate manager with a distinctive franchise from OMAM, and black control was the best way to give it a distinctive identity.
But mergers are not always a problem. The merger of Liberty Asset Management and SCMB Asset Management into Stanlib did not lead to the client outflows the group had budgeted for. There was a net inflow of funds in 2002 and earlier this year it received R2bn from the Investment Solutions Performer fund, the largest pooled balanced portfolio in SA.
In turn the distribution business, Stanlib Wealth Management, is dominated by Standard Bank executives, who had proved far more successful at gathering assets, despite SCMB's mediocre investment performance.
The past year has also seen a consolidation among medium-sized managers, including PSG's takeover of Appleton and most recently Cadiz's takeover of Prodigy-Coris to form a respectable R12,5bn operation.
Cadiz Specialised Asset Management MD Ram Barkai says that about 60% of Prodigy-Coris's funds, including most of Iscor Pension Fund's defined benefit assets, has been moved to Cadiz's specialised mandates. These rely on technical rather than fundamental analysis to outperform competitors and use derivatives to lock in performance.
Barkai says Cadiz will continue to manage balanced mandates for some of the Prodigy-Coris clients but he does not intend to turn the company into a mainstream asset manager offering all things to all people .
Investec's Du Toit says the next round of consolidation may take place when one of the large life offices decides to outsource its assets .
When Investec Asset Management took over Fedsure Asset Management it was a great boost for the firm's profitability and asset base.
The most vulnerable life office-owned asset manager a year ago would have been Sanlam Investment Management (SIM), which had performed below par over the previous four years. But Sanlam has finally gone about some serious surgery with the appointment of Johan van der Merwe, previously head of global resources at Investec, as CEO and George Howard, OMAM's head of research, as chief investment officer.
Van der Merwe says that despite the new hirings SIM's fixed costs have come down, so it will not be devastated by the market. It recently won a R150m balanced mandate from Momentum Multimanagers, which he considers a "moral victory".
Over the past nine months SIM has moved from ninth to sixth over one year in the Alexander Forbes Large Manager Watch for domestic-only mandates, so the restructuring seems to be working.
