The asset management market is in good shape. In the past seven years since the global financial crisis, markets have improved exponentially, according to Glenn Silverman, Chief Investment Officer at Investment Solutions.
The real concern is the future direction these markets will take. All eyes are on the United States Federal Reserve Bank which may raise rates in September. As a result, commodities, emerging markets and their currencies are under pressure, says Silverman. It takes “gumption and guts” to be an asset manager given the conditions of the macro environment, he says.
Following recent global fund manager, CEO and CIO visits and meetings with local and global asset managers, sentiments about South Africa’s economic performance were mostly negative. The slow economic growth and political economy are discouraging. The energy crisis, low credit agency ratings and government wage negotiations all contribute to accumulating risks, explains Silverman.
Speaking at a media briefing, Ann Leepile, head of manager research at Investment Solutions indicated four dichotomies in South Africa.
1. South Africa as an “unloved”
Emerging markets performed torridly in 2014, asset managers in emerging markets took a lot of “pain”, says Leepile. “South Africa is in a game where it can win, lose or draw,” says Silverman. However, South Africa has been scoring “own goals”. Citing the new Visa regulations as an example, Silverman explains how South Africa has done itself a disservice through taxing regulations that effectively discourage tourism. “Emerging markets remain the mistress, high beta, high risk… they may look cheap but people are struggling to make the leap,” adds Silverman.
Global managers are withdrawing from emerging markets, which is unfortunate, says Leepile.
There are vast differences of perspectives in the global manager landscape. For example, Cape Town and Johannesburg have different “macro” stories, despite both being within the same country, says Leepile. Cape Town- based managers have “strong” negative perspectives of the industry currently, while Johannesburg- based managers have done reasonably well with inflows, despite unfavourable conditions.
Industrials and resources
In their desperate search for value, Cape Town- based managers have underperformed. Johannesburg-based managers have performed better and are not as overweight in resources as Cape Town-based managers.
Johannesburg-based managers have a stronger link and understanding of the global landscape, says Leepile. “They have similar views as global managers which is why they have been saved from the underperformance of heavy resources,” she says. Most Johannesburg-based managers have similar views to foreigners, that is what protected them, she explains.
2. SA’s exposure to Rand hedge stocks
Given political activity, global managers are concerned about South Africa’s macro environment. Managers are comfortable with corporate governance of South African companies and the JSE as an exchange but shares are often bought from companies where earnings are outside of South Africa, says Leepile. “They [managers] don’t like what’s happening in South Africa,” says Leepile. They often choose to buy from companies like Discovery, Steinhoff, Shoprite, Bidvest, Sasol and Naspers. These companies have huge exposure and expansion plans into Africa and the developed market, she says.
3. Staffing complexities
The retention of staff remains an issue. Employment equity issues and immigration concerns are growing. The industry has lost three key financial service professionals at senior levels to the United Kingdom, United States and Canada, leaving gaps in the industry that can’t be easily filled or replaced, explains Leepile. Retention is also a challenge as people move out of the industry.
Cape Town has struggled to recruit employment equity candidates. “Getting black staff to Cape Town is a huge challenge,” says Leepile. As for Johannesburg, asset managers are spoilt for choice when it comes to finding black financial service professionals, she says.
4. Rise of passive
Due to fee pressures, active managers have underperformed. Less than 20% of active managers globally, meet indices, says Leepile. There has been a huge increase of assets going to passive portfolios. The passive strategies competing with each other will ultimately reduce fees, says Leepile. Passive portfolios is attracting strong flows which is a “strong, reinforcing” cycle, says Silverman.
So far, there has been a “pull and push pressure” from the passive management industry. In 2014 alone assets in passive portfolios increased by $200bn, says Leepile. This is accompanied by a 56% increase in passive investment over a five year period. There is room for both active and passive strategies, she says.
This article was featured on Finweek.com.