In 2018, the asset management sector in South Africa handled approximately R4.6-trillion in private equity and assets – nearly the equivalent of the country’s gross domestic profit (GDP) for the same year. At this valuation, it’s clear that this industry plays a crucial role in the allocation of capital that is essential for the growth, development and evolution of our economy and society.
In a society like South Africa’s, where unemployment is high and fostering a diversified economy is essential to create sustainable growth, the asset management industry is pivotal not only in improving our economic outlook, but also our social outlook. With healthy cash flow, this sector can assist in eradicating poverty and reducing inequality – two important objectives of the National Development Plan.
Asset managers make investment decisions to grow clients’ capital and obtain good returns. These professionals also have a duty of care towards their clients that requires them to act with skill and due diligence and in their clients’ best interests. Aside from good returns, investors also wish to retire in an environment that is strong, balanced and peaceful; hence asset managers must make investment decisions that will further such a goal.
B-BBEE is one of the key strategies for tackling poverty and inequality, thereby creating a more stable environment. As the various strategies that fall beneath the umbrella of B-BBEE move us towards a society that ensures progress for all, it can be argued that asset managers can only fulfil their fiduciary duty if they invest in a manner that furthers transformation.
Research from the International Monetary Fund, the Organisation for Economic Co-operation and Development and others, indicates that extreme inequality is not only bad for economic growth, but also fuels political and social instability. This, in turn, may deter international investment and decrease business confidence to further impact growth. As a result, it is vital that asset managers take into account the social impact of their investment strategies.
Against this backdrop, it is surprising that the face of asset management is still predominantly white. According to 27four Investment Managers’ BEE.conomics Transformation in South African Asset Management, an annual report on transformation in the South African asset management survey, black managers are responsible for only R490-billion, or 10%, of the nearly R5-trillion private sector asset pool. To put into perspective how dismal this is, black South Africans make up 80% of the population. While this ratio has increased significantly, with the number of black-owned firms increasing three-fold and funds managed up 243% between 2009 and 2018, there is still a long way to go.
The Public Investment Corporation (PIC) is attempting to further the progress of transformation in the asset management industry, increasing the assets controlled by black managers. At present, 14 of its 18 mandates lie with fully black-owned firms. This is encouraging news considering that the asset manager is the largest and most successful in Africa, handling approximately R2-trillion in assets.
The corporation’s B-BBEE Developmental Asset Manager Programme commenced in 2009 to transform the asset management industry and increase the participation of black investment professionals. In a Business Report article, PIC Head of Corporate Affairs Deon Botha said: “This was to be given effect through allocations to black asset managers and holding traditional established firms accountable to transformation targets.”
Aside from the small portion of assets being handled by black asset managers (BAMs), further problems are presented where, of the 48 BAMS, the top 10 are responsible for just below 84% of the pool of black-controlled money.
On the upside
Although the number of BAMs is low, B-BBEE scorecard information shows that the average level of equity ownership by black people in the top 10 investment businesses sits at 26%. Adding to this, 50% of the largest fund management businesses are led by black executives. The Alexander Forbes Survey of Retirement Fund Managers to June 2017 indicates that this means 60% of the total industry assets under management are overseen by black executives.
In Gobodo’s words, this picture is “not, by any means, one that says we have arrived in the promised land, but certainly an interesting picture worth considering and worth debating”. Considering this viewpoint, as well as statistics from the Southern African Venture Capital and Private Equity Association that indicate 80% of employees in the industry are black, one is likely still left asking why such change remains almost undetectable.
Understanding low yields
The high number of firms entering the market as well as firms’ varying levels of commercial maturity could be the reason the market appears to be relatively unchanged. In 2018, only two BAMs – Taquanta Asset Managers and Aluwani Capital Partners – managed assets valued at more than R50-billion. The problem, however, likely starts at a level far below the two top BAMs in the country.
Of the 48 BAMs in the market, the top five control approximately 65% of the assets available for management. The remaining 35% is divided among 43 firms.
Mapalo Mahku, founder of financial education platform Woman & Finance, believes that we need to educate children from a young age. By demystifying what asset managers do, it’s likely that more young black people will be encouraged to pursue a career in the industry, she said. Makhu added that while creating legislation that requires companies to achieve certain levels of transformation could work, “there needs to be a willingness to mentor and provide a conducive environment for young people to become fund managers”.
This standpoint is supported by the numbers set out in the BEE.conomics report. While a large percentage of firms participating in the survey offered bursaries to black students at higher education institutions, 83.3% of firms spent less than 1% of their leviable skills development amount on these students. 27four did, however, note that it is “inspiring” to see that one in 10 firms spend more than 2.5% of their leviable amount on bursaries for black students.
A further obstacle for BAMs is a lack of access to markets and capital due to inadequate support from trustees. Preferring tried-and-trusted asset managers over emerging firms, investors tend to stick with asset managers with good track records and longstanding reputation for providing good returns. This is understandable when considering that people’s life savings are usually on the line.
At present, only 15 BAMs having been in the business for more than 10 years and 23 for less than five. Adding to this, although 63% of BAMs are profitable, only a third show positive net profit for a period of three years. Karabo Morule, Managing Director of Old Mutual Personal Finance, acknowledged that this is the reason for black-owned asset managers experiencing difficulty in accessing a broader market: “Our company believes in the principle of time in the market, not timing the market.”
However, Morule added that the investment giant has implemented strategies to circumvent these barriers. “To balance our fiduciary and responsible investment duties, Old Mutual Personal Finance has developed an approach to support black-owned asset managers that also takes into account, among other criteria, the size and stability of investment teams, the structure of the business and investment teams, and its underlying investment philosophy.”
With 41% of firms spending less than 1% of their revenue on the professional development of their staff, this is clearly an area in which improvement is not just possible but necessary. Upskilling BAMs to fill positions at the asset consulting level – where decisions about which managers to invest with – will also likely increase the amounts invested with BAMs.
What is encouraging to see is that 66% of firms have a skills development programme in place. This indicates a commitment to build capability and mentor the next generation of asset managers, which is essential to guaranteeing the sustainability of the sector in the future. In addition to this, with only two months between President Cyril Ramaphosa’s launch of the Youth Employment Scheme (YES) and the survey, 12.5% of respondents participating in BEE.conomics were already engaging in the YES initiative.
Another solution may be to institute regulatory changes. Compelling retirement funds to allocate savings to black firms is one possible path. Considering the case of instruments like Linked Investment Service Providers (LISPs), regulatory requirements may be the best approach in some instances.
LISPs increase the ease with which investors can switch between portfolios and reduce costs. As a result, they are extremely popular. The problem with black-owned LISPs? There are none. If LISPs and other investment service providers were required to have certain levels of black ownership and equity before they may become operational, it might be one way to resolve this issue.
Further regulatory adjustments might set minimum thresholds for investment into education funds and employee development. This will likely contribute to furthering the progress of transformation in the industry. In addition to this, financial (REWARDS) could be given to those asset managers that create incubator programmes and the like to provide backing for promising BAMs struggling to enter the market.
Ultimately, to ensure the demise of poverty and inequality, the focus must be to support enterprises and create more jobs to fuel the economy, increase business confidence and encourage further investment. Pursing wealth at all costs without ensuring that wealth is widely and fairly distributed will only serve to exacerbate inequality and stunt growth. What is needed is an attitudinal change to ensure that we progress people over profits.