Black asset managers yet to sight uhuru
Only the fittest survive and normalisation of the asset management sector in SA remains slow
What started out as a data-gathering exercise 11 years ago to get a handle on the degree of participation by black-owned asset managers in the asset management sector has morphed into an annual socioeconomic research study providing data-driven evidence and analysis on the state of financial inclusion in SA.
The recently released 2019 edition of “BEE.conomics Transformation in SA Asset Management” presents revealing observations on the changing face of the savings and investments industry. The sector is reeling in a low-growth economy and needs to find a balance between delivering value to its customers and meeting the investment needs of the economy while concurrently restructuring to attain participation that is representative of the demographics of the country.
Our findings present an almost Darwinian analogy of how the sector has evolved over the period — where only the fittest survive, new species proliferate, others mutate and some go extinct. In 2009 there were 14 black-owned asset managers (more than 51% black ownership) managing about R90bn. Today this has grown to about R600bn managed by more than 50 players.
However, this is an industry comprising a small number of very large firms and a long tail of medium and small companies where half of all firms are exempted microenterprises generating annual turnover of less than R10m. Scale continues to favour those that have the ability to access markets through strong distribution, can leverage advances in technology and can attract experienced talent.
The lion’s share of the universe are independently established companies with only a handful of the product of broad-based BEE (B-BBEE) transactions. Overall, normalisation of the asset management sector in SA remains somewhat slow, particularly when it comes to ownership and executive management.
The proportion of black-owned asset managers focused only on private markets — real assets such as private equity and infrastructure — has been growing in recent years. This shift is indicative of changing investor appetite, fuelled by a five-year period of low returns from the JSE and a growing focus on long-term investment that can support the economy, drive job creation and deliver inflation-beating returns. To put this into context, when considering rolling five-year returns the current period has matched the poorest period of performance for the JSE in the past 30 years.
The depth and breadth of the JSE has only become worse. The number of companies listed on the JSE has halved from its peak in 1990 (696) to 354 now. Values and volumes traded have consistently fallen, creating somewhat of a vacuum, preventing shares lower down the market capitalisation spectrum from rerating.
Over the past decade some of the largest JSE companies have squandered more than R161bn in failed investments outside SA. A simple calculation shows that if this money had been spent on job creation at R200,000 per direct job, we could have created about 300,000 jobs over five years. Had this money been productively invested into our economy, the multiplier effect and contribution to economic growth would have been overwhelmingly positive.
Such factual arguments support controversial solutions such as prescribed assets to inform the agenda of policy discussions in the same way as excessively high medical costs and poor coverage will make National Health Insurance a reality in some form.
When it comes to the largest risks to their growth strategy, black-owned asset managers are chary about political interference and economic policy uncertainty — as concerned as they are about the spectre of low economic growth and a shrinking savings pool. They are also concerned about the silent restructuring of the retirement fund industry through the domination of umbrella funds.
The vast majority of firms believe some regulations have the inadvertent effect of raising barriers to entry and impeding the growth of emerging black enterprises within the sector. The way firms view B-BBEE legislation appears to be incongruous; the majority of firms are supportive of legislation that will enhance their market share, such as the B-BBEE scorecard for retirement funds, but at the same time do not score well on procuring services from black-owned enterprises.
On environmental, social and governance (ESG) issues, most asset managers agree that ESG has affected their portfolios’ risk and return characteristics and that ESG can help root out corruption in the public and private sectors. They also agree that the demands of greater accountability and scrutiny over how companies are run and their effect on wider stakeholders go beyond measures of pure price valuation.
Our findings indicate that as the asset management sector normalises to reflect effective participation by all South Africans, the diversity of views on the pathways for growth and development of the sector will increase and the mechanisms leveraged to create a robust, inclusive and competitive sector will need to be reviewed. B-BBEE legislation and the financial sector code in particular, are overly complex and difficult to implement. We should be working constructively towards legislation that is simple and fair and promotes a vibrant and thriving economy.
• Vawda is MD of 27four Investment Managers.