Bold move into tricky waters
Goodbye Omam, hello… well what?
YOU NEED REALLY BIG… well, let’s just say that Old Mutual has taken a brave decision to break up the largest asset manager in South Africa into 12 smaller, boutique-type managers. The concept looks great on paper. It also had to do something to meet changing investor demands. But there are question marks.
One is timing: the old and now departed Old Mutual Asset Managers (Omam), currently called the Old Mutual Investment Group SA (a more clumsy sounding Omigsa), has moved late on restructuring its business towards more focused, specialised and smaller funds. Perhaps better late than never – but it seems to have missed the big shift already seen in the market since 2000.
Briefly, Old Mutual has decided that small is better for performance and to meet clients’ needs. So it has taken a huge investment house and split it up into 12 “boutiques”, though they aren’t really boutiques in the true sense.
Still, the idea, says CEO Thabo Dloti, is to have 12 independent funds where investment professionals take far more decisions than under the big, one house view approach and are afforded the freedom to invest with more personal conviction.
The timing is bad, because this is what institutional investors started looking for more than three years ago, deciding they’d rather combine specialist funds to suit their portfolios than have a single manager or team make the asset allocation decisions for them. For example, Investec Asset Management dropped the house view and adopted a multi-specialised approach in 2000.
So Omigsa might not pick up the full benefit now of this change in institutional investor preference. But at the same time it looks like the retail investor market is moving in the opposite direction.
Retail unit trust flows throughout last year showed a move out of more specialised funds and into asset allocation, basically balanced funds where the manager makes all the decisions. It may be due to increased investor caution, though it’s more likely increased financial adviser caution as they face more threatening legislation for poor advice. But the point is that retail investors seem now to be looking for balanced funds rather than a collection of specialised funds.
Omigsa has a wide offering. For instance, its Macro Strategy Investment Fund could cater for these retail investors’ needs. Headed by Peter Brooke, it’s essentially an actively managed balanced fund that will select asset classes and investment styles.
Still, the new “boutique” structure has been launched into a market moving in different directions and it may be hard to cater fully for both institutional and retail investors.
“Boutique managers have been given the autonomy to take the critical business and investment decisions that drive performance,” says Dloti. That extends to who to recruit, products and the fees each boutique will charge. Dloti says that through profit sharing, based on client fees, a fund manager’s income will depend on performance, so the manager does well only when wealth is created and the client does well.
Sounds great. But my big concern is, although each business has autonomy, it remains part of a large group being fed by a large distribution network. How much necessary underperformance will be tolerated?
True boutiques – where it’s often the fund manager and a few other investment people who own the whole business – often go out on a limb. They take a view contrary to the market and therefore might underperform the market for some time. But if they’ve got it right, that’s underperformance for all the right reasons. When the unpopular investment choices come through, they beat the market convincingly.
But can the independent managers at Omigsa really do that: take a view out of line with the herd and go through a long period of underperformance? I’m sure they’d like to, but will management – maybe even at life company level – put up with an underperformer while brokers are trying to sell the fund and shortsighted clients are maybe bailing out? I hope so; but that remains to be seen.
Remuneration is also tricky. Dloti says fund managers will still receive a “nominal salary” but declined to detail the profit-sharing split.
Still, it’s a necessary change and incorporates some good prospects, such as the recently acquired Umbono Fund Managers, a tracker and related funds house that MD Tendai Musikavanhu says will emphasise low fees and benefit from the increased funds that the Old Mutual deal brings with it. Focusing on black savers and investors, the empowerment fund manager plans to have the largest index fund in Africa.
But the new boutique structure is just starting and many subtleties may need to be ironed out. It will take time to see if it’s working.
Will he allow necessary underperformance? Thabo Dloti
Brings a new offering. Tendai Musikavanhu