Financial Mail - Investors Monthly
Lily-white finance
It’s time to change the fact that black asset managers control just 4.6% of assets in SA, writes Johann Barnard
One wouldn’t want to wish the mining industry’s unrest and upheaval on anyone. It has, however, highlighted the strife that inequality in pay and working conditions and the need for more equitable representation can produce.
The spotlight on the financial sector is considerably different.
By the broadest definition of financial services, the sector controls about R12 trillion worth of assets, with around R9 trillion managed by SA’s 130 asset management companies. According to figures provided to parliament last year, only R408.3bn (or 4.6%) is managed by black asset management companies.
The extent of this distortion was laid bare last year when public hearings were held in parliament on transformation in the sector by the standing committee on finance and the portfolio committee on trade and industry.
Further evidence of the sad state of affairs is available in 27four Investment Managers’ annual BEEconomics survey. According to this study, black firms manage about R415.5bn of the roughly R4.6 trillion available for private sector asset managers.
This shows not only a lack of transformation, but also high degrees of concentration in the market. The research shows that 10 firms manage 86% of industry assets, with one firm controlling 29% of the market.
“It’s quite an interesting time where transformation in the financial services sector has reached a record high in terms of focus and attention from government and the private sector,” says 27four MD Fatima Vawda.
“Momentum has built, and what came out of those parliamentary hearings was that there is a huge part of the private sector that feels marginalised and feels they are not being integrated in the broader functioning of that sector.”
Given the huge pools of money at stake, it would be naive to expect entrenched players to relinquish such a heady source of income. And if one wanted to politicise the debate, the financial sector could easily assume the mantle as the poster child of “white monopoly capital”.
As one industry player commented, there is little motivation for those controlling the money to give up their positions.
One outcome from the parliamentary hearings that may break the shackles was the suggestion from the department of trade & industry that state assets be managed by asset managers with at least 51% black ownership and/or level 4 broad-based BEE status. Add to this the amended financial sector code that was published in December, and real progress might be on the cards.
It doesn’t suffer the same stigma as the mining charter and has been widely — but cautiously — lauded by the asset management industry.
“The charters are a good way for us to articulate what we’re trying to do, but it’s important that we embrace them and not cherry-pick what we like,” says Old Mutual Investment Group MD Khaya Gobodo.
“Draconian and interventionist legislation, I fear, will have unintended outcomes such as those we’ve seen in the mining sector. So, things that substantially distort the free flow of capital to pursue the best outcomes are undesirable.”
Gobodo says the way in which transformation and inclusion is measured is important. He argues that measuring only black-owned firms unfairly distorts the picture.
“We need to look at the full spectrum of what transformation is about in the asset management industry. Is 10% a high-enough number for businesses founded and managed by courageous black investment professionals? My gut answer is no.
“But what if we open the lens a little and ask what proportion of overall savings are managed by black people, wherever they reside? Because as a trustee they want to know who, ultimately, is responsible for making investment decisions.
“That number is between 18% and 25%. And is that number high enough? My gut feel is no, but it’s not 10%.”
Broadening this lens to capture the leadership of asset management companies, he says, will show that nearly two-thirds of industry assets are under the influence of black CEOs.
This view might be more accommodating than owners of black firms might be willing to concede.
Mergence Investment Managers MD Masimo Magerman says transformation “is shackled by the establishment [that] still, to a large degree, directs and orchestrates outcomes”.
He says these entrenched players are unwilling to lose market share in the interests of transformation.
“They will take, and have taken, measures necessary to ensure they survive or even thrive by entrenching their position through leveraging their networks, power and influence where possible.
“SA has established intermediaries [that] have meaningful influence over a substantial amount of savings. They are the middlemen between clients and asset managers and their influence should not be underestimated. The fact is that these intermediaries are largely untransformed themselves, and have established models and preferred asset managers [that] continue to benefit from their advice to clients.”
Royal Investment Managers CEO Kabelo Rikhotso lays the blame for reluctance to transform on a misguided belief that black investment professionals are poor performers and more risky.
This is not true, he says, with recent data from the Eskom Pension & Provident Fund showing that there is no evidence to support this perception.
“The issue of poor performance is not real. We saw Mazi Capital win the 2018 Morningstar award for best SA equity fund, so we don’t believe this bias is true.”
He adds that while black firms need to be given the opportunity to manage more assets, they also need to be given the support to build sustainable businesses that can attract top talent.
Royal Investment Managers is a black-owned investment holding company backed by Royal Bafokeng Holdings and RMI Investment Managers. It acquires minority stakes in asset management businesses that embrace diversity and provides them with strategic support.
Rikhotso says the challenge for new entrants into the market is to differentiate themselves from the rest of the field. He believes it is less about investment talent and more about identifying your niche and pursuing it.
“It is better to be great or the best in a few unique capabilities than being below-average across many products.”
He adds that interventions such as the charter are helpful, but that as a black investment professional he would want to be given an opportunity not only because of his race, but because he’s good at what he does.
“First and foremost it has to be on merit because we have the experience, qualifications and track record and because we believe we can compete and deliver superior investment results.”
Much more needs to be done for the financial sector to become truly reflective of SA. For consumers this is about having their interests protected, while for industry professionals this is about being recognised as just that — professionals.