Bold move into tricky wa­ters

Good­bye Omam, hello… well what?

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za

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

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