Willis Towers Watson Asset Managers Review
What further changes do you foresee, or would you like to see, in the coming years – affecting the investment management industry?
Natalie Phillips, SA Head of Institutional, INVESTEC ASSET MANAGEMENT would like to see a further allowance for South African retirement funds to invest offshore given that the opportunity set of the South African listed market in particular, continues to be overly concentrated.
“I would also like to see further encouragement of investment in infrastructure and renewables, with flexibility allowed to invest in different geographies and subasset classes in this space.
“The consideration of ESG will become a focal point and it will become central to investment manager engagement with companies in South Africa. Sustainability indexes will become far more widely used and South African retirement funds will demand far great information and results by the investment industry in terms of the quality of engagement with companies.
“In terms of investment grade credit we are likely to see more liquidity and price discovery, which will facilitate product innovation across the credit spectrum.”
Phillips says foreign participation in emerging markets local currency debt is likely to continue, but the nature of the flows may shift more from an ‘easy money’ cyclical allocation as we have seen over the last five years to a more secular asset allocation theme.
Kirshni Totaram, global head of institutional business at CORONATION FUND MANAGERS says there is likely to be a continual increase in the adoption of index-like strategies, which will impact the market share of the current large independents who are all active managers.
“We will also see continued pressure and focus on transformation within the industry. Here again, we would like to see the focus evolve to a more broad-based approach (rather than a heavy focus on ownership), which we believe leads to more sustainable outcomes over time.
“The increase in industry regulation has raised the cost of doing business and the amount of infrastructure and skill required. We expect this will continue for some time.
“We would like to see a more pragmatic principles-based approach as opposed to rules-based approach to regulation where the focus is on substance rather than volume. In addition, we would encourage greater transparency of outcomes (net of fees) that investors actually receive from various investment strategies,” says Totaram.
Khaya Gobodo, MD at OLD MUTUAL INVESTMENT GROUP says over the last 25 years South African investors have been richly rewarded in terms of real return outcomes as a result of the combination of domestic political change, structurally lower inflation, synchronised global growth and a powerful equity bull market. Beta alone has delivered very attractive inflation beating returns for investors.
“With the expectation of lower future returns setting in and the increased focus on costs there has been a significant shift toward passive strategies. I expect this trend to slowdown in the coming years for two reasons: in a low nominal return environment, beta becomes much more valuable; and there are risks on the horizon that will require active management in order to protect capital,” says Gobodo.
Bastian Teichgreeber, portfolio manager & analyst at PRESCIENT INVESTMENT MANAGEMENT says when it comes to investing in our continent, South Africa is often recognised as the portal to Africa. This is for good reason: a stable banking system, a developed capital market and a sophisticated investment industry are positive factors not easily found elsewhere on the continent. It is now up to us to keep this positive trend going and to implement the reforms, which will take us another step further.
“The most important factors for us to remain attractive for international investors are political stability, the protection of property rights, a credible and independent reserve bank as well as improving the openness of our economy. We think South Africa is on track with most of these priorities.
“The regulatory change which enabled investors to take on more offshore exposure signals economic openness globally. The vote for Cyril Ramaphosa as our president means more political stability. And finally, the fact that politicians have reaffirmed and pronounced the SARB’s independence is also encouraging.
“When it comes to property rights, however, we have moved one step back. The continued discussion around land expropriation without compensation threw a spanner in the works of improving investor confidence.
“On balance, however, we think the new South African government has the willingness and the capacity to move things in the right direction to make South Africa an even more attractive place for investors than it already is,” says Teichgreeber.
Sandy McGregor, portfolio manager at ALLAN GRAY says the pace of change in global demographics will become increasingly important for South Africa. As an ageing workforce evolves from being a net saver to a net consumer there will be increasing pressure on the pool of the world’s savings. The impact of this change will be exacerbated by the reality
that almost everywhere accumulated savings are inadequate to fund required retirement benefits. Even countries with favourable regional demographics will not escape from the consequences of this demographic challenge. In a world with one integrated financial market, there will be no place to hide.
Matt Brenzel, joint chief investment officer at CADIZ ASSET MANAGEMENT says the competitive landscape will intensify, leading to consolidation between the smaller managers. This will be driven in part by the regulatory and compliance requirements, which have intensified exponentially and have all come with a significant cost burden.
“Thinking longer term, increased automation could potentially see my successor being replaced by a quant-oriented computer!”
Tshego Modise, head business development at AEON INVESTMENT MANAGEMENT says greater disclosure by investment managers of their ratings for the United Nations Principles for Responsible Investment (UNPRI) assessment reports. Internationally the investment community is supporting the allocation of assets with managers who embrace and apply ESG principles into portfolio construction and engagement activities. Responsible investing has been proven to provide noteworthy investment returns and it is time the market participants advocate for it.
Johan Gouws, head of institutional consulting at SASFIN WEALTH says foresees a reduction in the number of funds available in the CIS industry, reduction in number of white labelled offerings, and increased fee transparency.
Mark Appleton, head of multi asset and strategy at ASHBURTON INVESTMENTS says regulation allowing for larger allocations to long term real economy assets, specifically infrastructure and social capital investments, which not only provide investors with the opportunity to invest in long term assets with strong inflation protection, but also make a positive contribution to improving the quality of life of retirement fund members and greater society. Their mainstream popularity will however be limited until solutions can be found to some of the liquidity challenges that these investments present to defined contribution pension fund savers and retail investors.
“Funding long-term investments such as infrastructure has become capital intensive for banks and institutional investors have been stepping in to close the gap. The ability to package these investments, or address the regulatory constraints that prevent these investments from finding their way into the retail market, will be a key challenge for the future.
“Further development of indexation across the industry will ultimately result in a more natural balance between Active and Passive (rather than the current “binary’ debate),” says Appleton.
He would also like to see the professionalisation of the financial advisor industry to increase the quality of decision making on behalf of end investors.
“Additionally, further disintermediation, where appropriate, to allow investors the option to make simpler investment decisions at a cheaper cost and with less admin.
“We would also welcome the increasing use of technology across the value chain to simplify and improve client experience,” says Appleton.
What further changes do you foresee, or would you like to see, in the coming years – affecting retirement funds and the broader savings environment?
Kirshni Totaram, global head of institutional business at CORONATION FUND MANAGERS foresees an increase in the use of indexation, which is of material concern given the concentrated nature of our equity markets.
“There is potential for material unintended risks being taken within retirement funds. In addition, we believe that an increased use of index-like strategies could lower the eventual cumulative return investors receive over the long term.
“We also foresee massive focus on ESG matters, which could overshoot and result in unintended consequences. We’d like to see more pragmatic ESG guidance as prevention.
“We see a greater move toward umbrella funds, changing the current manner in which the industry operates and increasing the role and responsibility that the end consumer needs to play in their long-term savings.
“We’d like to see greater education for consumers on the topic of saving, especially
if they are more involved in the decision-making process. It would also be good to see more transparency on the value for money provided from all service providers in the retirement savings-investment chain. Lastly, we believe that better management of the conflicts of interest within the financial services industry will ultimately be a good outcome for the end investor,” says Totaram.
Khaya Gobodo, MD at OLD MUTUAL INVESTMENT GROUP says there has been a significant movement of smaller, standalone retirement funds migrating to umbrella funds over the recent years. Currently there are about 5 000 registered retirement funds, as opposed to the more than 16 000 that existed about 12 years ago. This makes complete sense given the higher costs involved with operating standalone funds and the increased regulatory requirements and personal exposure that trustees have.
“In the coming years, I expect to see further consolidation of this nature, given that less than 40% of these registered funds receive regular contributions and the majority of them are still of a small, standalone nature.
Corporate umbrella funds now represent 15% of corporate pension assets in South Africa. Considering that umbrella funds are growing on average about twoand-a-half times faster than standalone funds, I expect the amount of registered funds to decrease significantly over the coming years,” says Gobodo.
Natalie Phillips, SA Head of Institutional, INVESTEC ASSET MANAGEMENT says there is likely to be even more focus on outcomes rather than peer relative performance. In a market as concentrated as the South African direct, listed bond and equity markets, active management will continue to thrive. The industry will evolve to become more solutions focused in ensuring member needs are met.
“We are also likely to see a more holistic approach in meeting member needs pre- and post retirement. Trustees will have a far greater role and responsibility in helping aid members in tracking their savings up to retirement. A fund can use a liability index to illustrate how their returns are measuring up against a stated replacement ratio target. There will be far more innovation and usage of technology in assisting retirement funds and individuals in solutions and communication for their investment and retirement fund needs.
“We expect further consolidation with a few umbrella funds, mega funds and financial advisors and consultants dominating the South African savings landscape. These large allocators and shepherds of capital are also likely to be more globally integrated.
“Lastly, we are likely to see greater alignment between the service provider and the retirement fund or end client and greater transparency in terms of the skill that one is paying for through the introduction of sophisticated ‘pay for performance’ structures,” says Phillips.
St John Bunkell, head of equities and Nafees Hossain portfolio manager & analyst at PRESCIENT INVESTMENT MANAGEMENT say the company anticipates increased demand and investor contributions for responsible investing as growing consideration is given to the environmental, social and governance (ESG) aspects, alongside financial factors in making investment decisions.
Where liability driven investing (LDI) is concerned, we see the emergence of LDI-based strategies linked to investments in infrastructure. Growth in the capital markets will assist in developing investments that are linked to GDP growth. There are likely to be changes driven by the implementation of creative LDI approaches within equities. We’d like to see more support from regulatory bodies in the form of taxation and other benefits.
There is also likely to be a big shift from traditional asset classes like bonds, equities and cash to alternatives. In terms of the rise of new alternative asset classes within portfolios, we’re already seeing big shifts into funds like infrastructure and renewables. We would like to see more risk premia being researched and offered to the market in the form of low fee solutions to afford accessibility.
Asief Mohamed, chief investment officer, at AEON INVESTMENT MANAGEMENT says the recently amended Financial Services Sector Codes have included a voluntary Retirement Scorecard for Retirement Funds, Umbrella Funds and other investor funds. The scorecard strongly recommends funds to disclose their BBBEE scorecards to better align the industry with Responsible Investing. The disclosure of gender and race profiles of assets owned by members of Retirement, Umbrella and Investor Funds will help considerably in reducing inequality of wealth and income in South Africa by allowing companies to improve their BBBEE Ownership scorecards
Sandy McGregor, portfolio manager at ALLAN GRAY says there is a trend of growing regulation of financial markets and of the custodians of the savings pool. No one disputes the proposition that there needs to be an effective regulatory system to protect savers. The problem is that increasing regulation is creating an inflexible system of ever-compounding complexity. The next major financial crisis may well be caused by unintended consequences of regulation. Furthermore, regulation is imposing ever-increasing costs on savers, in a world where investment returns are significantly lower than they used to be. There needs to be a new approach to regulation to create a more efficient and less costly system.
Matt Brenzel, joint chief investment officer at CADIZ ASSET MANAGEMENT would like to see South Africa become a nation of savers. This will require a “hallelujah moment”, when a structural change in the country’s economic growth path drives higher employment, raised earnings and a well-developed financial literacy.
Fabian de Beer, director investments at MERGENCE INVESTMENT MANAGERS says more of a direct line, communication and relationship between investors and asset managers, and greater impetus and support from the authorities and legislative framework to encouraging retirement provision and savings.
De Beer would also like to see: consumer financial education to create and enhance a savings culture and combat scams; and better interventions and support models to help employees and citizens prepare properly and sufficiently for retirement, especially in light of the growth in defined contribution schemes.
Rowan Williams-Short, head of fixed interest at VUNANI FUND MANAGERS says conflicts of interest need to be eradicated. Trustee education should be ongoing and ever-more professional. Trustees should be vigilant in measuring their own investment decisions, not only those of their managers. This is especially so with funds prone to frequently hiring and firing managers.
Dr Adrian Saville, chief executive officer of CANNON ASSET MANAGERS says there are two key changes he hopes to see in the coming years, the first of which is the engagement of blockchain technology.
“It is staggering how often savings become orphaned as a result of people leaving their employment without realising that they have a savings fund.
“Blockchain offers a potentially effective solution to addressing the problem by ensuring that funds are carried throughout a person’s working career. As life expectancy and working lives are being prolonged, a permanent and portable savings vehicle becomes increasingly important.”
The second change is the engagement of nudge behaviour.
“Simple mathematics tells us that the earlier we get saving and investing, the more powerful an impact compound interest will have on our terminal wealth. We therefore need to find ways to encourage or nudge ourselves and others to begin saving at younger ages and in greater amounts.
“In addition to nudge behaviour, we also need to ensure that people are invested in the right asset classes, recognising that a 25-year-old, for example, typically doesn’t need to be invested in government bonds, which act as a drag in the early years of savings and, in the final analysis are not a buffer but rather a brake.
“Of course, later on in the savings cycle bonds become not just relevant but increasingly critical. The industry has not adjusted to these factors, such as longer life expectancy or the capacity to make a step-change in life-staging of asset allocation,” says Saville.