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Picture: 123RF/RAWPIXEL
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The BEE.conomics annual research report developed and published by 27four Investment Managers provides the most comprehensive review of the asset management industry, with more than 11 years of data and intelligence. 

A summary of findings from the report is presented below.

You can also page through the full report below, which covers a range of subjects including expert commentary, key trends, historical statistics, league tables and results along with insight on the impact of Covid-19 on the industry. Zoom in or go full-screen for ease of reading:

 

Black-owned market share

  • As at June 30 2020, total assets managed by black-owned firms advanced to R668bn, a 15% increase from 2019. 
  • There are 51 black-owned asset managers across both public and private markets.
  • Black market share of the total estimated SA savings and investment pool is 9%.

Impact of Covid-19

  • About half of all participants expect Covid-19 to have a negative impact on their bottom line. Such firms have implemented cost containment measures, which include reducing marketing budgets, deferring or cancelling planned investments, placing freezes on new hires, and taking bonus and salary sacrifices. 
  • Only a handful of firms took advantage of government relief measures such as tax deferral holidays.
  • An overwhelming majority of firms envision a new world of work with less air travel and an increase in remote working and use of technology-based communication platforms.
  • The pandemic has also brought impact investment to the forefront as many debt and equity recovery funds have emerged to help businesses mitigate the negative financial consequences inflicted by the economic slowdown.

Asset allocation trends and changes in the demand side

  • Within public markets, just over 60% of industry assets are invested in low-risk money market and fixed-income products. These are also low-margin products and require significant scale to drive profitability. Domestic equities have progressively been losing market share over the past decade and now make up just 22% of assets under management (AUM), having made up 50% of total AUM in 2010. Exposure to domestic equities has fallen sharply, a reflection of lacklustre performance, low investor confidence and an economy on its knees. Outflows from domestic equities were equipoised by flows into the domestic money market and fixed income, where the safety of real yields and low volatility was favoured by investors. 
  • The demand side in SA is changing, and investors have become much more discerning and less tolerant of lacklustre performance and high fees, particularly in the case of active fund management. Institutional investors are also searching for diversified sources of return that can match long-term liabilities, cushion portfolios from the shocks of market sell-offs, meet developmental goals and deliver inflation-beating returns. Given these multiple objectives, we can expect the industry to gradually adapt to such pressures with more offerings emerging at opposite ends of the spectrum — costly high alpha alternatives where managers are paid for the delivery of long-term performance, and low-cost passive beta solutions. 

Private markets, prescribed assets and change in regulations

  • An already weak economy worsened by Covid-19 has left the government seeking a new narrative to accelerate an economic recovery. As such, the idea of using prescribed assets to help foster economic growth has resurfaced, packaged in the form of an infrastructure fund to finance strategic projects by combining capital from the public and private sectors, retirement funds, development finance institutions and multilateral development banks. With expectations of capital flows into real assets, the asset management industry appears to be readying itself: new and existing firms are building capacity and skills to be able to manage such flows. 
  • Twenty private markets firms, which have together raised R19.3bn across 30 funds, completed the survey this year.
  • The resulting growth in appetite for impact investment through unlisted assets may precipitate a change to Regulation 28 of the Pension Funds Act, which currently caps private equity and hedge funds at 15%. Calls have been made by The Southern African Venture Capital and Private Equity Association to separate hedge funds from private equity and gradually increase the private equity limit. The finance minister has publicly flirted with the idea of increasing the limit, indicating that this is under review by National Treasury. Similar calls have been made to amend Collective Investment Schemes Control Act to allow unit trusts to hold unlisted exposure.

Scale and distribution

  • Ninety percent of public market asset managers’ asset base is sourced from institutional investors such as retirement funds, and are concerned about the consolidation of retirement funds under umbrella arrangements. 
  • Retail penetration appears to be lethargically progressing with black-owned asset managers’ market share of the unit trust industry now at 9%, represented by 25 firms managing 106 unit trust portfolios.
  • Firms also envision a greater increase in M&A as companies harness skills, expertise and resources together in a shift towards greater market consolidation.

Environmental, social, and corporate governance

  • Twelve firms are signatories to the UN Principles for Responsible Investment.
  • The majority of firms agree that the pandemic has once again exposed the fragility of the financial markets and current economic systems, and that a shift of alignment to achieving the UN Sustainable Development Goals is becoming urgent.

Socioeconomic statistics

  • The revenue model of asset management is built for scale, and so the increase in industry AUM did not translate into an increase in job creation. The industry employs 638 people, marginally down from last year.
  • There was little movement in the demographic composition of asset manager teams since 2019. None of the managers’ teams are homogeneous and positively reflect both race and gender diversity.
  • There was a marked improvement in the number of firms achieving profitability as 76% of all firms indicated that they are profitable up from 68% recorded in the previous year.
  • Women representation at both ownership and directorship levels continue to disappoint relative to all other sectors within the economy (B-BBEE Commission, 2020).
  • Going into 2021, transformation of the financial sector will be in the spotlight with new legislation focused on achieving parity within the sector coming into play. Such legislation includes the Employment Equity Amendment Bill, currently in draft form, which will allow for the employment and labour minister to identify sectoral numerical targets to ensure representation reflective of our demographics. We can also expect to see the Conduct of Financial Institutions Bill come into effect, and an updated iteration of the Financial Sector Code gazetted. 

Download a copy of the full report at 27four.com or page through the digital edition on BusinessLIVE

BEE.conomics is produced and published by 27four Investment Managers.

This article was paid for by 27Four Investment Managers.

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