Willis Towers Watson Asset Managers Review
What are the biggest and most impactful changes you have seen over the last 20 years or so, affecting the SA investment and savings industries?
Khaya Gobodo, MD at OLD MUTUAL INVESTMENT GROUP says the increased participation ratio by foreign investors in SA Inc has increased the absolute flow of capital, which has been extremely powerful for investment returns.
Foreign ownership is now around 40% of the total market capitalisation of the JSE, up from less than 30% in 2008.
“SA Inc has also given investors access to growth in offshore earnings, given that 65% of the.
Top 40 listed companies’ earnings come from foreign sources, of which just over 50% is from the top 10 largest companies alone.
“Furthermore, local investors are now able to allocate further capital offshore, which in theory, can hedge them against adverse movements in the rand.
This is an important driver of growth for South African investors, given that SA Inc only makes up about 1% of global GDP.
“We have just recently seen further increases in offshore allowances, with the limits for collective investment schemes, investment managers and longterm insurers rising from 35% to 40% and for non-linked longterm insurers and retirement funds from 25% to 30%.
This implies that despite exchange controls, South African investors are effectively able to allocate 100% of their savings pool outside of South Africa,” says Gobodo. Kirshni Totaram, global head of institutional business at CORONATION FUND MANAGERS says the biggest impact on the savings industry is the relaxation of exchange controls to allow up to 40% of funds to be invested in assets outside South Africa. It materially improves the levels of diversification that funds can achieve in the pursuit of their investment objectives and allows for better risk controls and enhanced sources of return.
“Another major impact has been the evolution in benchmarks – primarily aimed at decreasing the concentration within SA equity indices, specifically that of the resources sector. However, this remains an on-going challenge as the dominance of Naspers (largely as a result of its holding in Tencent) led to it being in excess of 20% of index on many occasions.
“This dominance of a few successful companies materially shaped the returns generated by South African equities over the last 20 years. In contrast, we have seen an evolution of, and deepening in, the corporate credit market in South Africa. This has led to the rise of flexible fixed income strategies that enable investors to maximise the risk-adjusted returns available from the fixed income space and thereby diversify the sources of return.
Natalie Phillips, SA Head of Institutional, INVESTEC ASSET MANAGEMENT says the two that stand out are firstly, the move from defined benefit to defined contribution (DC) funds and the resultant rise of member investment choice, and secondly, the relaxation of exchange controls, which now allow for 30% offshore investment and 10% in Africa ex-SA.
“Although the DC environment has come with a great number of benefits for the member, it is important to note that the significant impact of this move is that if a particular member’s returns are below average over the period until his or her retirement, he or she will directly feel the effect of this as a lower retirement income.
“Members in this position should have tracked their savings versus their target and increased their savings for retirement to achieve their target. Where a member failed to do this, or was not provided with this information by the Fund, he or she is at risk of retiring on a less than adequate pension.”
Phillips says considering South Africa’s stock market represents only around 1% of the world’s total listed equity market capitalisation, having some offshore equity exposure is a logical choice.
“The further relaxation of exchange control announced in February this year provides South African retirement funds with additional opportunities and flexibility in terms of their investments. The benefits include diversification, broader sector and industry exposure and a currency hedge against the Rand,” says Phillips.
Bastian Teichgreeber, portfolio manager & analyst at PRESCIENT INVESTMENT MANAGEMENT says over the last 20 years, investing in South Africa has been full of challenges. Political ups and downs, a volatile currency, as well as several global crises, created a difficult market environment. It is, therefore, almost surprising to see that the South African equity market was among the strongest globally over the last two decades. Opening the economy up step by step as well as becoming less dependent on the commodity super cycle were certainly factors, which helped to keep our market interesting for foreign investors. However, index concentration, changes to regulation and a high dependency on foreign investments have been the factors which made investing in South Africa particularly difficult. But, with the political environment more stable now, South African Investors could benefit from structural reforms and a more stable currency going forward. This would mean that some of the toughest challenges of the last 20 years have finally been overcome.
Andrew Davison, head: advice at OLD MUTUAL CORPORATE CONSULTANTS says there have been quite a number of changes that have had a significant impact on the savings landscape but if he focuses on one then it’s likely to be the shift from stand-alone funds to umbrella funds.
“Although umbrella funds were around just over 30 years ago they were not as dominant as they are today and this trend is continuing with the number of registered stand-alone funds declining and membership of umbrella funds increasing.
“Umbrella funds have had a significant impact on the investment strategy of funds and their members. Among these are that segregated mandates are far less common, as pooled arrangements are better suited to umbrella funds,” says Davison.
He contends that the changes to Regulation 28 also supports multi-asset class portfolios, as the requirement for compliance at a member level means that it isn’t cost-effective to allow members to construct their own portfolios using specialist building blocks.
“Another impact of this trend is that multi-manager portfolios have proved popular as a one-stop, fully-diversified option for members, most of whom don’t have the ability to select between different asset managers, says Davison.
Matt Brenzel, joint chief investment officer at CADIZ ASSET MANAGEMENT says the seminal event occurred in early 1995 with the lifting of the financial Rand.
This eliminated the two-tier capital control system, which had been place – on and off and in different guises – for the previous three decades. Its abolition heralded a new thinking on financial flows into and out of South Africa.
This change was reflected in the change in the Pension Funds Act, allowing local funds to invest a portion of their assets offshore. Risk and return metrics were substantially improved as a result.
He says another key feature in the past two decades has been a further disaggregation of the fund manager and his-her client. This has been through the growth of the disrupters of the industry: other service providers such as multi-managers, independent financial advisors, discretionary fund managers and passive funds – all fighting over the same bone.
Sandy McGregor, portfolio manager at ALLAN GRAY says the pool of assets managed by South African investment managers has grown immensely over the past two decades. Simultaneously the equity market has evolved to include fewer but larger listed companies. The growth in the assets under management has been accompanied by decreasing choice. To a degree this adverse trend has been ameliorated by allowing asset managers to invest offshore.
To manage money successfully within South Africa one needs a global perspective. Our domestic asset prices are largely determined by foreign investors whose decisions are determined by developments elsewhere.
There is one integrated global capital market. Achieving superior returns now requires a manager who has superior international investment skills. Increasingly the concept of local markets is disappearing and the investment industry must adjust to this reality.
Dr Adrian Saville, chief executive officer of CANNON ASSET MANAGERS says one of the biggest changes has been the gradual opening up of the South African economy and markets to international capital and influence.
While this process began in the early nineties, the impact has become increasingly pronounced as foreign investment has continued to grow in the past 20 years, as evidenced by global funding of South Africa’s large current account deficit, budget deficit and the population of our stock exchange.
Another big change has been the emergence of a strong and increasingly affluent middle class in South Africa, creating a new generation of potential savers and investors, and opening new opportunities for the industry.
Johan Gouws, head of institutional consulting at SASFIN WEALTH says the most impactful changes are regulatory changes in terms of advice, white labelled fund arrangements, the move to Umbrella funds, consumer protection the enhancement of indexation and passive-smart beta offerings.
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