How has the asset management industry coped with lockdown?
Has the pandemic affected different parts of our industry differently? Large and small, boutique and insurer and financial services giant – are the challenges the same? Will all survive? What collaborations and new innovations will emerge post-crisis? These were some of the questions in our minds as we gathered responses from a sample of asset managers.
“The good seaman weathers the storm he cannot avoid and avoids the storm he cannot weather.” So goes the quote from the unknown ancient mariner. To a large extent, the risk-assessment framework that forms the basis of the financial services industry has enabled courageous actions overall. However, avoidance of the market carnage has been impossible, and the effects will be felt possibly longer than the virus persists.
As George William Curtis pointed out, “It is not the ship so much as the skilful sailing that assures the prosperous voyage.” Times of crisis reveal creativity, ingenuity and resilience of spirit. Our findings confirm that this is true even in the time of coronavirus.
The onset of the COVID-19 crisis marked the denouement of the various headwinds facing the asset management sector namely, margin compression from slow growth in assets under management and revenues, rising operating costs, pressure on fees and intense competition. The current headwinds have ushered in a storm that not all participants will weather. At the end of March 2020, Nedgroup Investments announced that Electus Fund Managers, the appointed portfolio manager in its Growth Fund, had decided to throw in the towel after 15 years. The action it said had been precipitated by the “unforeseen decline in assets under management and subsequent financial pressure on the business” coupled with low growth prospects. This highlights the tough choices small firms are facing in a difficult environment. This challenge is aptly encapsulated in a quote from a recent sector report by SEI, a leading provider of technology-driven wealth and investment management solutions, noting “Massive scale is not critical but critical mass is”, and will drive responses to this ongoing crisis.
Prior to this, in December 2019, RECM founder Piet Viljoen announced a merger with Sam Houlie’s Counterpoint. In the search for critical mass, firms have sought entrepreneurial acquisitions to bolster expertise, or to integrate desired financial services offerings. In 2018, Bidvest Group acquired Cannon Asset Managers, a firm founded in 1998 by Adrian Saville. Sanlam Investment Holdings acquired shares in financial technology business Easy Equities in 2017. RMI Investment Holdings (RMI) bought stakes in independent money-managers creating a multi-affiliate investment management group. They partnered with Royal Bafokeng Holdings in 2016 to have an empowerment partner to extend its affiliate strategy. RMI and Royal Investment Management (RIM) own stakes in 12 investment managers that together managed an estimated R140 billion before the COVID-19 crisis. African Rainbow Capital, the investment company started by mining magnate, Patrice Motsepe, acquired a stake in Colourfield Liability Solutions, the largest investment manager of third-party liability driven investment solutions in South Africa in 2016 and more recently snapped up a stake in start-up firm, Lima Mbeu.
Over the course of the last decade, the proliferation of boutique firms specialising in listed equity investments has intensified competition. In 2019 alone, there were 11 new firms and 45 new strategy entries in the Alexander Forbes Manager Watch surveys, according to Janina Slawski, Head of Investments Consulting at Alexander Forbes Investments.
Total industry assets under management included in the Alexander Forbes Annual Retirement Fund Survey amounted to approximately R5 trillion at the end of 2018. Median assets under management were R23.7 billion up from R11.8 billion in 2015 as smaller firms gained market share. The largest ten asset managers saw slower asset growth, with the median firm growing by approximately 6%, constrained by a sluggish economic environment and lacklustre markets. With the industry maturing over the last decade, outflows have increased, and the rapid growth due to increasing contributions and solid investment growth has abated.
Can asset managers afford to build resilience and adopt technological change?
As the impact of the COVID-19 pandemic grips the economy, employers are considering temporarily reducing salaries, allowing members to decrease retirement fund contributions and even taking contribution holidays to use cashflow for business survival over a limited period. Asset managers report a spike of unit trust outflows with clients switching to cash and fixed income as individual investors and corporates seek immediate liquidity. The prospect of retrenchments and the potential massive withdrawal of retirement savings further exacerbates the situation as falling market values mean less revenue for the industry. As South Africans grapple with lower incomes, high levels of indebtedness and delayed retirements, there will be less money to save and invest. Asset managers will have to adjust, either by finding new avenues to grow revenues or better managing their biggest costs — people, technology, and rent.
The cost structure of an asset management business has changed, with many costs rising faster than inflation. Controlling expenses without diminishing capacity to deliver to clients, cash preservation, reprioritisation and reallocation of budgets is crucial. It is expensive to hire risk and compliance specialists to deal with an ever-changing regulatory environment and provide the right technology to support the different compliance functions, many of which are more challenging in a home office environment – sign-off control systems, for instance. Bloomberg and many data systems used in investing are billed in dollars. Rand depreciation continues to ratchet up technology costs. Firms are more expensive to run, and it takes more assets under management to just break even.
Building a resilient firm that can survive continued margin pressure means upgrading operations and the faster adoption of digitisation in an industry that is notoriously considered a “digital laggard”. The technology infrastructure, software and hardware must also be adequate to support a different technology environment where the entire office works from home.
There is an opportunity to spur business improvements, redefine certain customer service experiences to lower costs, improve productivity, and create internal capacity to do more while preserving jobs. Partnering with business-critical suppliers that can bring the right skills or opportunities to the core business is certainly worthy of consideration.
Is industry consolidation part of the answer?
The COVID-19 pandemic will accelerate industry consolidation to the extent that many firms will need to grow assets under management faster than their underlying fixed cost bases. However, large asset management firms are leery of the big transformative acquisitions of the early 2000s. Experience shows mergers and acquisition are notoriously difficult to execute. Trying to integrate a business and bed down different cultures and technology without a clear understanding where the vulnerabilities are, is fraught with risk. High institutional client overlap adds to the risk of client attrition after the merger.
The objective of any acquisition should be clear – whether it is forming an alliance of firms to scale resources; buying assets to gain scale; adding a new investment capability; enhancing black economic empowerment credentials; taking a stake in an umbrella fund; or “lifting” a team that has unique capabilities – and must be duly considered when embarking on this course.
Asset managers without a strong performance track record will come under pressure as investors gravitate towards top performing firms. Over the next 12-18 months, there is likely to be a “flight to quality” as clients flock to those businesses seen as low solvency risks, where they can trust the business continuity processes, get quality service and a distinctive experience, competitive fees and expect good investment performance.
Not every asset management firm will survive the market upheaval from the COVID-19 crisis. Marginal firms without sufficient cash buffers, or patient, deep-pocketed shareholders will go out of business. Access to government assistance plans and regulatory abeyance to support businesses that are experiencing short-term stress will help some companies, if assets under management do not drop significantly. Access to distribution networks to sell their products gives insurer-owned asset managers a slight edge here, but even in this instance they cannot escape a slowdown in insurance premium growth. While these closures will be disruptive and extract deep social costs, they may leave the sector on a stronger footing in aggregate.
So, can the crisis spur innovation? Are there any silver linings that can come out of this?
One innovation to come out of the crisis is the changing perception of working from home. Contrary to most expectations, productivity has been higher, with less dead time travelling. Managers will need to be more flexible than they have been about how people work, even when restrictions start to ease. Longer-term, this new way of working may mean reductions in the amount of commercial real estate required and firms will downsize their real estate footprints. Less travel could also reduce wear and tear on the country’s aging road infrastructure and result in lower greenhouse gas emissions with positive consequences for the environment.
Expensive conferences in fancy venues with overpriced attendance fees and attendant travel budgets may become a thing of the past. Virtual townhalls on virtual meeting and conference platforms (e.g. MS Teams, Skype, Zoom etc.) with financial advisers, consultants and trustees can accommodate hundreds, even thousands of clients at a lower cost than hosting large client events, and potentially without compromising effectiveness.
Maintaining the work culture in a virtual world without close proximity is a challenge. Leaders have had to adapt quickly to a complex, unpredictable situation, working under tremendous uncertainty. Engagement with employees has had to change from in-person meetings to virtual video and telephone interactions. Greater awareness of one’s colleagues is needed – especially those who are managing many constraints working remotely. In meetings, creating opportunities for more reserved or introverted people to contribute and give input is key. This can make meeting dynamics better with the additional benefit of listening to fresh voices, although they may take longer to conclude.
“The situation requires that you mobilise employees in a different way than you have done before, in what is an abnormal situation. If a person does not have a proper chair to sit on at home, supply their work chair to them so that they can work. It is important to do the small things that matter most to employees at this time, where we can.”
Employers can make it more attractive for employees to work from home in many different ways. For instance, ensuring secure, fast connections to homes, and backup connections at a time when work-from-home connectivity issues abound; paying for employee data and phone costs; recommending standardised equipment for the home office so that technology is compatible, thereby reducing the ongoing management headache on stretched IT resources; and negotiating discounts on recommended home-office equipment with suppliers.
Good leadership in a stressful environment calls for a more personal and relatable management style, while providing inspiration. As one business leader said: “The situation requires that you mobilise employees in a different way than you have done before, in what is an abnormal situation. If a person does not have a proper chair to sit on at home, supply their work chair to them so that they can work. It is important to do the small things that matter most to employees at this time, where we can.”
“A black swan … was meant to explain why in a networked world we need to change business practices and social norms” and not “to provide a cliché for anything bad that surprises us.”
Broadening enterprise risk management to think more about ‘fat tail’ outcomes and non-traditional types of risk that can severely disrupt business is crucial. How does the business build-in redundancy? Where are the single points of vulnerability? What are the costs of interconnected networks? Nassim Taleb interrogated these ideas in his 2007 best-selling book, The Black Swan. In a recent interview in The New Yorker magazine, Taleb is quoted as saying that “a black swan” the term he coined for an unpredictable, rare, catastrophic event, “was meant to explain why in a networked world we need to change business practices and social norms” and not “to provide a cliché for anything bad that surprises us.” Scenario planning to take into account first- and second-order impacts of a crisis is equally important in addition to making sure there are robust contingency plans in place. This requires cross-cutting expertise in order to understand integrated outcomes; the right organisational structure to foster the right connectivity and information sharing across the business to better identify and anticipate an ever-changing set of risks.
Ultimately, building resilience to exogenous shocks like this one will become ever more important. Investing in multi-asset classes, multi-geography and multi-currency and diversifying away from a single asset class has added a material buffer for some firms. Many local investors are under-allocated to alternatives in general and illiquid investments, in particular. Asset managers can help stimulate the economy by pooling capital from savers and allocating it to where it is required. Opportunities for the private sector in infrastructure investing (including housing, transport, health infrastructure, food security, Information, Communication and Technology (ICT)), can allow redirection of government resources to other pressing needs as well as help reduce inequality and unemployment in a meaningful way. Investment in domestic manufacturing capacity to reduce dependence on distant supply chains will be a new imperative.
Weathering the headwinds arising out of COVID-19 will contribute to building a financially sustainable and resilient asset management industry, which is good for clients and is good for South Africa.
ABOUT THE AUTHORS:
Muitheri Wahome has held several executive strategic and operationally focused roles in the financial services industry, including most recently as the Chief Client Officer at Alexander Forbes Investment, and now runs a consulting practice focused on providing strategic advice to senior management and boards in the sector. She has a deep, longstanding interest in financial inclusion and in the history of the institutional investment industry, and is working on a book on the history of the asset management industry in South Africa.
✉ muitheri@outlook.com
Bev Bouwer is a qualified actuary and Chartered Financial Analyst (CFA®), who has worked in the retirement fund industry for over 30 years, the majority of that time spent as a senior investment consultant to trustee boards of large funds. She is currently exploring opportunities to provide advice on the use of technology, better modelling techniques and big data to the asset management industry.
✉ Bevbouwer44@gmail.com
REFERENCES:
Nedgroup Investments Growth Fund ‘Notice to investors’, March 30, 2020
Evolution in Asset Management By SEI |New Ways New Answers
Alexander Forbes Annual Retirement Fund Survey 2020
Alexander Forbes Hot Topics, March 2020
“The Pandemic isn’t a black swan but a portent of a more fragile global system”. Bernard Avishai The New Yorker, April 21, 2020
WITH SPECIAL THANKS TO:
Benguela Fund Managers
Mianzo Asset Management
Prudential Portfolio Management
Ngwedi Investment Managers
Perpetua Asset Management
Old Mutual Investment Group
STANLIB Asset Management
Aluwani Capital Partners
Kagiso Asset Management
Prescient Investment Management
Meago Asset Management
Sentio Capital Management
Visio Capital Management
Ninety-One Limited
Cannon Asset Management
Sanlam Investments
Allan Gray Limited
Coronation Fund Managers
Fairtree Asset Management
Alexander Forbes Investments
First Avenue Investment Management
DISCLAIMER:
The article is provided for information and educational purposes only and is not intended to provide legal or investment advice. The authors do not claim responsibility for the accuracy or reliability of data provided.