The first stage of the evolution of the asset management industry was when pension funds stopped either trying to manage their assets in-house, or giving their assets to an insurance company in exchange for a guaranteed return. That step took fund managers from being mere departments of the insurance companies.

Most are still embedded in larger financial services firms, though, and only Coronation Fund Managers is listed in its own right.

Coronation has shown that a well-run asset manager can be a huge cash generator: it needs very little capital and it can manage R100bn with the same number of staff it needs to manage R10bn.

Coronation CEO Thys du Toit says that many of its competitors can depend on cash flows from an associate life company for growth, but a business such as Coronation can grow only if it offers clients superior investment performance and client service.

But for years asset managers enjoyed managing the entire portfolio through a fully discretionary balanced mandate. About 15 years ago, to reduce manager risk, consultants started to split funds between two or three managers, each with a balanced mandate.

Balanced mandates have proved to be an excellent source of inflation-beating returns. This has helped pension funds meet their liabilities (the payouts they have to make) a lot more comfortably than similar funds overseas.

Over five years the average balanced fund has provided an annualised return of 34,1%.

The Alexander Forbes Large Manager Watch (LMW) is still seen as the main barometer of an asset manager's investment performance, but in spite of the excellent returns, the amount of money managed in balanced portfolios is stagnant. The R50bn managed is little more than it was three years ago, and the number of portfolios that managers have submitted to the LMW survey has fallen substantially.

Managers with large balanced books in the past now put in only a handful of portfolios in these surveys. Old Mutual Asset Managers, for example, has just two clients in the SA LMW and five in the global LMW; Sanlam has seven clients in the global survey and two in the SA LMW. The exceptions to the trend are Allan Gray, which now represents more than 40% of the money in these surveys, and RMB with 34 clients in them. Both firms still offer one primary product that distills the best investment views of the entire team.

But that is becoming the exception. Increasingly, pension funds want to divide up their pension funds between specialist managers - they might have two or three equity managers with their own distinctive styles and possibly a core and aggressive bond manager.

Investec under Hendrik du Toit was the first manager to divide up the business into separate specialist silos, focusing, for example, on value shares (those that are trading below intrinsic value) or growth shares (with above-average growth potential).

Investec's former global chief investment officer, George Brits, is trying to recreate the specialist approach at Stanlib, which until recently operated on a centralised basis around a model portfolio.

"We need to build up a number of franchises if we are going to become a commercially driven asset manager," says Brits.

The growth of specialisation has been driven to a large extent by the multimanagers such as Advantage, Symmetry and Investment Solutions - it is possible for a R10m-R50m pension fund to access a range of specialist managers by buying into a multimanager's pooled portfolio. It would not have been economically viable for a fund to do so on a standalone basis.

Multimanagers have also facilitated the rise of specialist boutiques, as asset managers no longer have to offer a full-service balanced portfolio management service.

Many of these boutiques can attract money as they are run by high-profile portfolio managers with strong track records in unit trusts. Among the most successful have been Polaris Capital, run by Tim Allsop, and Regarding Capital Management, by Piet Viljoen. The rise of the hedge-fund phenomenon has also provided the opportunity to set up boutiques, which are very attractive for managers who want to escape the increasingly bureaucratic and benchmark-driven approach of the larger managers.

The most successful migration from mainstream institutional investment into hedge funds has been Tantalum Capital, set up by Morné Marais, former chief investment officer of Coronation, and his former colleagues Rob Oellermann, Richard Kommel, Melanie Stockigt and Mike Lawrenson.

Over the past 15 months the number of SA hedge funds has increased from 70 to 95 and the asset base has increased from R7bn to R15bn. Over the past six months there has been an injection of R3bn from some of the largest pension funds, such as the Mines Pensions Fund, Eskom, Telkom and Transnet.