However, 2022 has proven to be the most challenging year for markets in a very long time.

The confluence of political and financial upheaval has led to an environment of high volatility and drawdowns in asset classes across the board. The dispersion in returns has been extreme.

According to Morningstar, the gap between the best and worst performing South African unit trusts for the year to the end of November was more than 100 percentage points. The top-performer was up 57.4%, while the worst returned -42.2%.

Even in the balanced fund (multi-asset high equity) category, the dispersion was greater than 30 percentage points. Where the best return was 12.8%, the worst was -21.6%.

In this environment, it has been pleasing to see that boutique managers, (our affiliates in particular) have continued to show the value of nimble and flexible decision making. Based on figures to the end of September 2022, over 50% of the funds managed by our affiliates have achieved above median returns over every time period from one month to seven years. Over five years, just under 50% are top quartile, and 65% are above average.

Investment Performance: Proportion of funds in each quartile

This confirms our view that investment-driven, owner-managed boutiques are in a uniquely strong position to be able to deliver alpha, which has always guided our philosophy for investing in these businesses. In recent years, we have also seen the ability of these firms to take market share from larger managers.  

This shift first became apparent in the institutional market and is now becoming more noticeable in the retail space as well. Over the past five years, the share of the unit trust market held by South Africa’s four largest asset managers has declined from 40.8% to 38.1%, according to statistics from the Association for Savings and Investment South Africa (ASISA) and we have seen how our affiliates have been able to grow their presence in this market. At acquisition, just 13% of the assets managed by the firms in our portfolio were in unit trusts, as opposed to segregated mandates. At the end of the third quarter of 2022, this had grown to 25%.

AUM Diversification

We are also witnessing growing interest from discretionary fund managers (DFMs) and multi-managers in boutique firms, with our affiliates increasingly being included in model portfolios. This further underlines our view that there will be inevitable shifts in allocations as track records are built up and maintained. It is an indication that boutique managers in South Africa are slowly, but consistently, proving their value.

We believe the volatile market environment, which is likely to persist for some time, strengthens the arguments for using these firms that can be more agile in their investment decision making. Opportunities come and go so fast, that when swift decision-making is required, smaller managers are certainly at an advantage.

Shifting allocations

This positive story, however, is not without its challenges. The increase in offshore allowance under Regulation 28 announced at this year’s budget will inevitably have an impact on the local asset management industry. The general market view is that this could result in more money moving offshore and if these current perceptions and regulations prevail, most of it will be allocated to international asset managers at the expense of South African firms. This is likely to pose a bigger risk to smaller managers where relatively small re-allocations can be meaningful to their businesses.

The industry needs to continue discussing these developments with National Treasury and the regulators to ensure that the greater offshore allowance does not create unintended negative consequences. The benefits to South African investors are clear, but it should not be at the expense of the local industry. If significant amounts of money are going to be allocated away from local firms to large international managers, how does that benefit the local economy and the need to support local job creation?

Might it be worth putting regulation in place to ensure that at least part of any global allocation needs to be managed locally? That need not exclude international managers if those firms are willing to open offices in South Africa. It may also be worth asking how the strategic objectives of transformation are being served if international managers can receive allocations without being scrutinised on their broad-based black economic empowerment (B-BBEE) efforts.

Diversity

Diversity is a second area where local asset managers, and particularly boutique firms, are facing renewed scrutiny. Earlier this year Alexforbes Investments, the largest multi-manager in the country, announced that it will not allocate to any managers that do not meet its transformation requirements by June 2025. We have also seen moves by the likes of Old Mutual Multi-Managers to grow their allocations to black-owned firms.

It has always been an important consideration for us that we want to help build businesses that reflect the society they ultimately serve. We have set all our affiliates a target of achieving a Level 3 B-BBEE rating or better and are pleased that six of the nine businesses in our portfolio already meet that objective with four achieving a Level 1 rating and the remaining affiliates working deliberately to improve their scores.

As shareholders, we will continue driving this focus with all our affiliates at a strategic level, and although we are pleased with the progress made to date, it remains an imperative, and understand that there is still more that needs to be done. In particular, the level of senior female representation remains disappointing. Even though our affiliates fall above the industry average, that average is so low and the rate of change so pedestrian that just being better than average is not a sufficient target. We would hope to see more women in senior decision-making roles across our affiliates in the coming years.

Industry landscape

Looking ahead, we believe that the discussions around consolidation in the local asset management industry will continue. So far, there has been a lot of expectation, but little in the way of actual corporate action. This is an indication of how difficult mergers and acquisitions are to deliver successfully in this industry. Asset managers are people businesses and finding cultural and philosophical alignment is not easy despite the transactions looking good on paper.

Nevertheless, two of our own affiliates have been involved in corporate action this year, with 10X’s acquisition of CoreShares, and the recent announcement that New York-headquartered Rohatyn Group has agreed to acquire the future fund business of Ethos Private Equity. We believe that both deals are extremely positive for the affiliates in question and that their new partners will provide them with an enhanced strategic means to achieve their respective growth ambitions.

We also remain opportunistic with regards to building out our portfolio of affiliates and will engage in consolidation and expansion discussions as they arise.  

On the home front, our discussions with Momentum Metropolitan (MMH) in relation to their interest to acquire Rand Merchant Investment Holdings’ (RMI) stake in our business is progressing well. MMH has been a supportive shareholder in our independent affiliate business model alongside RMI and Royal Bafokeng Holdings since inception and we are excited about the potential of the increased partnership as we continue to serve our affiliate managers in the same way we have done over the past seven years.

Looking ahead, we continue our path of steady growth. Particularly in markets like we have seen in the past year, the focus remains delivering on those matters that are in our control. For both RMI IMG and our affiliates, this means having clear long-term objectives, and achieving those incremental gains that compound over time.