The changing landscape of the SA investment industry
Our Asset Manager Review has been a quarterly publication over the last 20 years. We are very proud of this milestone, and we thank the many contributors who have provided editorial material and advertising over the years, helping to make the feature such a success.
Back at the outset, our Global Balanced survey covered 36 investment products from 26 firms. Today, the same survey covers 34 products from 25 firms – so the coverage of the survey has not changed much over 20 years, although the assets included have risen from R 105-billion to R 473-billion.
Of course, the names included in the survey have changed quite significantly. Of the 26 firms included in 1998, only twelve are still participating today, and many others have come and gone over the years.
We have included 20-year performance figures for the twelve investment products that now have a 20-year track record. Even the worst-performing of these products would have beaten inflation by more than 5% per year, after costs and fees, over the full period – this would be a good outcome for any investor!
The last 20 years have seen many changes in the South African investment industry, for managers and investors alike. In the pages which follow, we ask the investment managers what they consider to be the most significant developments of the last twenty-odd years, and what further developments they expect (or would like to see).
Bearing in mind recent corporate scandals, including the Steinhoff saga, we also ask the managers whether there are things that should be done differently in future, to mitigate the risk of losses the next time a large listed company or a large borrower in the bond markets gets into trouble.
We can identify some major drivers of the multitude of changes that the local industry has experienced since the mid-1990s. One of the most significant of these, clearly, is globalization and the opening-up of the South African economy and markets.
The relaxation of exchange controls, beginning in 1995, has allowed retirement funds (and other institutional investors, as well as individuals) to invest progressively larger amounts offshore, and is perhaps the most obvious result of this opening-up process. But the effect on our investment markets should not be underestimated either.
As Allan Gray’s Sandy McGregor and others point out, the profile of the businesses listed on the JSE has changed quite substantially, and we are indeed part of “one integrated global capital market” for both equities and bonds.
The number of shares listed has reduced by about half, with the remaining listed companies being significantly larger. To some extent this has reduced the choices available on the local exchange, but the counter to this is that many of these businesses now have significant foreign operations, and a number of foreign businesses now have secondary listings on the JSE, so that an investor who wants to diversify away from the local economy can do this without even needing to invest offshore.
Related to this is the modernization of the trading platforms for both equities and bonds, including the migration to a “dematerialized” environment in which ownership is no longer evidenced by share or bond certificates. This was partly a move by the exchanges to adopt global best practice, but it was undoubtedly helped by the revolution in information technology over recent decades, which has had other effects on our pensions industry too.
Technology certainly helped the move from a Defined Benefit environment (in which pensions were calculated using a formula based on salary and length of service at retirement) to a Defined Contribution environment (in which retirement benefits are really a form of savings account) – a revolution which swept over the South African pensions industry from the mid-1980s and was largely complete by the late 1990s.
One of the advantages of Defined Benefit funds was that the data needed to calculate benefits was quite limited. As large-scale data storage and manipulation became easier and cheaper, the record-keeping for complex Defined Contribution funds became more practical, allowing them to offer investment choices to individual members, sometimes with daily investment switching and often with complex “Life Stage” default investment strategies requiring automated switching at set trigger points.
The growth of the multi-employer “umbrella” retirement funds and the unit trust industry also undoubtedly benefited from technological change including the ability to show members and investors near-real-time investment values, and to allow online transacting.
Cheaper processing power and data storage helped other developments such as the rise of the multi-managers and investment “platform” businesses (both needing to aggregate investment data from many underlying portfolios managed by different firms), and also the proliferation of share and bond indices, as well as enabling specialist firms to construct and market index-tracking investment products that were both cheap and “true to label”.
General structural changes in the South African investment and pensions industries over the last 20 years include the disintermediation, to some extent, of the actual investment managers from their ultimate clients, as the role of multi-managers and investment platforms has grown – a comment made by Matt Brenzel of Cadiz. However, an important counter to this is the rise and current strength of a number of non-traditional investment “brands”.
Twenty years ago, almost half of the assets in our Global Balanced survey were managed by the investment arms of the large insurers, whereas today’s big names (such as Allan Gray, Coronation, Foord, and Investec) had only a 20% share of the assets covered. Now, the traditional large insurers manage less than 10% of the assets surveyed, whereas the share managed by these four firms has increased to well over 50%.
Another structural change that has affected retirement fund members can be characterized as a move away from “paternalism” towards “individualism”. Defined Benefit funds were fairly paternalistic, aiming to reward long-serving employees with a secure lifetime pension (although ironically the main beneficiaries of this system were often the senior employees who received the largest salary increases over their careers).
By contrast, the Defined Contribution environment, especially in its member-choice and umbrella-fund manifestations, has tended to place significant emphasis on flexibility, choice, and individual freedom.
One obvious symptom of this has been the wholesale replacement of the traditional “life annuity” pension by the new-style “living annuity” post-retirement savings product, in which the retiree has some control over the investments from which he or she draws an income, but bears the risk that insufficient starting capital or poor investment returns will mean the money expires before the pensioner does.
Again, the irony here is that the senior employees, who have the largest savings pools at retirement, may be the main ones to benefit from this new system!
This tendency for the pensions industry to “retail-ize” itself has not gone unnoticed by the regulator (the Financial Services Conduct Authority – the former Financial Services Board).
The regulator has introduced various measures over the last 20 years or so, aimed at improving governance standards for retirement funds and making funds more accountable and responsive to the ordinary employees who are their members.
These include giving members the right to elect at least half the trustees of an employer-sponsored fund, and the so-called “PF130” circular some years ago which set out good-governance standards that trustee boards are expected to comply with.
The new Regulation 28 under the Pension Funds Act issued in 2011 required funds (mainly via their investment managers) to take account of environmental, social and governance sustainability considerations when investing.
A recently published draft Directive will increase the pressure on trustees to think seriously about their responsibilities as long-term investors, and the long-term sustainability of the investments held.
More recently, the so-called “Default” Regulations will require the trustees of Defined Contribution funds to make pension options (which may include a living annuity that meets certain standards) available to retiring members.
These will have to be funded by whatever savings the member has in the fund at retirement, so this does not turn the clock back to the Defined Benefit era, but clearly the aim is that funds should take more responsibility for their members when they retire as well as while they are still in employment.
These “Default” Regulations also place greater focus on cost management and cost disclosure by retirement funds.
Putting ever greater responsibility on the shoulders of retirement fund trustees will undoubtedly mean that the trend away from single-employer funds towards umbrella funds will continue and grow stronger.
The governance of umbrella funds is something that the regulator is still grappling with.
However, the National Treasury has indicated that it would like to see the number of retirement funds reducing to only around 200 funds.
This will require enormous consolidation – a list published by the regulator last year shows that there are still more than 750 pension and provident funds (excluding commercial umbrella funds) with assets of more than R 100-million each.
These funds had combined assets of almost R1.5-trillion, and more than eight million members.
By contrast, the commercial umbrella funds had combined assets of just over R 400-billion, and about 2.5-million members.
Although consolidation will be a slow process, we believe that this will be the most important trend affecting the South African pensions industry over the next twenty years – it will not be possible to put the umbrella-fund genie back in the bottle!
We hope that the same high governance standards will be applied to the umbrella funds as are expected of the trustees of single-employer funds – otherwise consolidation will work against the interests of ordinary employees and savers, not in their favour.