The fund management industry - the darling of the 1990s - finds itself under growing pressure now, says Coronation Fund Managers CE Thys du Toit. His is the only listed fund manager in SA.
A year ago, when the equity market in SA and overseas was bottoming out, it was estimated that most of the world's asset management firms were not profitable.
Despite the short-term recovery in financial markets, says Du Toit, the squeeze on margins continues: many of the midsized participants with insufficient scale in the savings industry are feeling the pinch. Quaystone, one of the 10 members of the Large Manager Watch, closes at the end of June.
Investec Asset Management CEO Hendrik du Toit says some players have a problem with assets under management being mature and static. "The market recovery is not up to record highs, so it has merely given the industry some breathing space. There is a real danger that some money managers have not taken enough action."
Hendrik du Toit says that in SA rationalisation is being hampered by the past willingness of corporate owners to support their uneconomic asset management subsidiaries.
It was only after Nedcor destroyed two of the strongest brands in SA asset management, Syfrets and UAL, that it finally accepted that it was more sensible to focus on the distribution of funds.
The actual profitability of the asset management units within large banks and life offices is not clear, as they engage in opaque transfer pricing.
About two-thirds of SA's life, pension and unit trust assets are managed by five groups: Old Mutual Asset Managers, the largest manager, with about R250bn under management; Sanlam Investment Management with R210bn; Stanlib Asset Management with R160bn; RMB Asset Management with R140bn; and Investec Asset Management with R120bn.
There is then quite a large dip in assets to Allan Gray, which manages almost R80bn. Four years ago it had less than a fifth of that under management. It is followed by Coronation on R60bn, then there is another large gap before Metropolitan with R35bn, African Harvest and Prudential with about R18bn each and Oasis with R10bn.
Investment performance is still the most important growth driver. It was hard for pension fund trustees not to be tempted to back Allan Gray, which returned 20,8% over three years, or Oasis, which provided 20,2%, well above the 12,4% from third-placed Prudential.
The fastest-growing asset manager of the past 12 months has been African Harvest, which joined the Large Manager Watch on April 1. Its outperformance has not been as dramatic as Allan Gray's, but CEO Magda Wierzycka says its risk-controlled value style provides more consistent, incremental performance. Its understanding of risk has made Harvest (and Prudential, which has a similar approach) appealing to multimanagers.
Investec's Du Toit says there is a larger choice of products, including absolute return funds, as a result of concern about market risk. Pension fund trustees and consultants are giving out funds on a specialist mandate basis - typically awarding fund managers a specialist equity or bond mandate or mandates for sectors such as resources.
Two of the largest fund managers in SA are Futuregrowth and Abvest, with more than R30bn each under management. They do not appear in the Large Manager Watch as they do not have significant balanced assets. Neither manager would have been economically viable without the trend towards specialist mandates.
Another growing niche is quantitative and passive management. One of the fastest growers in this territory has been Prescient Investment Management, a quantitative manager which uses mathematical models to enhance returns on a chosen index. Futuregrowth also manages a large pool of quants money as one of its specialist capabilities, along with high-yield bonds and infrastructure funds.
But Hendrik du Toit says that during any period of sustained market recovery, pension fund trustees prefer to let the asset managers make the asset allocation decisions, which could mean a revival of the balanced mandate.
In contrast with stockbroking, foreigners have made few inroads into the SA asset management market (unless you consider Old Mutual to be a British company). Only two , Prudential and Alliance Capital, have reasonable scale in SA.
During the year, Prudential consolidated its position as one of the leaders outside the top tier of managers. It benefited from the strong reputation of its London-based global tactical asset allocation capability and won a global TAA mandate from SA's largest multimanager, Investment Solutions.
Alliance Capital, part of the giant New York-based group, also kept a toe-hold in the SA market. It buys shares for their earnings growth prospects rather than the intrinsic value of their assets.
Momentum Multimanagers has made Alliance one of the three managers of its aggressive fund along with Foord Asset Management, an absolute value manager, and RMB Asset Management, a solid mainstream manager which is now vying with Allan Gray for top slot in the Large Manager Watch.
