Flight to safety: Local economic and political uncertainty has given wealthy South Africans an appetite for investing in ‘safe’ jurisdictions. Picture: 123RF/Rabia Elif Aksoy
Flight to safety: Local economic and political uncertainty has given wealthy South Africans an appetite for investing in ‘safe’ jurisdictions. Picture: 123RF/Rabia Elif Aksoy

The number of international, or “offshore”, investment managers competing in SA has increased in the past few years.

Among the top 20 largest asset management businesses globally, companies such as BlackRock, Fidelity Investments, BNY Mellon Investment Management, Goldman Sachs Asset Management and T Rowe Price have increased their activity in SA. But there has also been increased activity among other companies that have been operating in SA for a number of years. These include Aberdeen Standard, Franklin Templeton, Schroder Investment Management, Columbia Threadneedle Investments, Dodge & Cox, Sarasin, Fundsmith and Baillie Gifford.

Notably absent are names such as Vanguard and State Street, large passive managers that have benefited from the global shift into index investing. In 2018 flows into US passive equity funds almost surpassed those of active managers, with about 48% of assets now held by index strategies.

The SA market is somewhat perplexed by this increased activity as it is certainly not experiencing a growth trajectory in the local assets under management from pensions funds and the retail investor. The number of foreign collective investment schemes has certainly risen over the past three years, from 407 schemes in March 2017 to 455 in March 2019, but this is not really material in the context of the growth of the number of local collective investment schemes.

The net flow into foreign collective schemes has not necessarily been extraordinary, with only R1bn flowing into these schemes during the first quarter of 2019. Net flows into foreign collective investment schemes was negative R6bn in 2018. The total assets in foreign collective schemes was R108bn in Dec 2009 and 10 years later now stands at only R476bn, hardly explosive growth.

While the real reason for this increased appetite is hard to determine, the following country-specific and industry structural reasons may be responsible:

  • SA has been fraught with economic and political uncertainty and the appetite to invest in “safe” jurisdictions has been the recreation of SA’s wealthy.
  • SA stock market performance over the past five years has been anaemic, cementing its place as the worst five-year period for the JSE over 50 years.
  • Internationally, the S&P 500 five-year return is up 50.07% as Donald Trump’s trade wars and “Make America great again” slogan revived the US economy. The MSCI world index (ex US) is up a meagre 2.9% in dollar terms over a five-year period.
  • From an asset management industry perspective, foreign asset managers probably find the SA market attractive in terms of fee margins. Internationally fund manager fees have been compressed, sinking to a global asset-weighted average of 44 basis points. In SA, these fees have not been compressed to the same degree as fees for passive investments, so have not really provided much competition to the local active asset managers.
  • Many of the foreign asset managers have based their African representation in Dubai and targeted the expat community, which makes up about 7.8-million of the country’s 9.2-million population. With the collapse of the oil price, combined with increasing living costs and the downsizing of construction projects, thousands of expats are being sent back to their home countries. This suggests that those asset managers that are based in the United Arab Emirates would be looking to new markets to build capacity.
  • The relaxation of regulation 28 in 2018, through which the Treasury increased the limits on foreign assets permissible for retirement funds from 25% to 30%, has also meant that a local multi-asset fund of funds could increase its offshore holdings in foreign managers. Large retirement funds could do the same.

While foreign asset managers are keen to contest the SA market, the local market has strong competitors with household brand names, competent global asset management capabilities and significant distribution presence. These managers will not give up their market share without a fight and the local regulatory environment for these foreign fund managers to register is fraught with complexity and bureaucracy.

However, the foreign global asset management presence is likely to weigh on smaller asset management companies operating in SA. In the US, 82% of assets are held in 10 firms, and global consolidation and mergers was certainly the key theme at FundForum, Europe’s largest gathering of asset managers and an industry thought leadership event.

Asset managers are being squeezed by rising operating costs, heavier compliance burdens, shifting client expectations and tougher competition. Only time will tell whether the foreign asset managers will succeed in competing with strong regional players in SA and whether smaller fund management groups can stand up to this increased competition.

• Hinton is founder of The Collaborative Exchange.