TowersWatsonAsset ManagerReview

What has changed over the last 20 years in the South African investment markets and investor community? What effects, positive or negative, have these changes had on the job of active fund management?

says the South African market has seen significant change over the last 20 years.

“In my opinion, the biggest change is the amount of foreign capital that has entered our market. Foreigners now own 40 percent of the JSE and have a big impact on the pricing of stocks.

“They tend to take shorter term views, are less sensitive to valuation and focus on the macro prospects of a market or sector.

“They have greatly improved liquidity and their presence should present an opportunity to the investor who is prepared to take a long-term view.”

says markets seem to have become more efficient in the sense that better quality companies can be more expensive for longer.

This is tricky for investors with a value bias to navigate and can lead to prolonged periods of style-biased performance rankings. However, careful valuationbased investing, while out of favour at present, has a high probability of long term success.

The global participation in South African shares has grown, so share price movements are more dependent on global flows and also global peer comparisons.

This creates an opportunity for active managers who are able to apply their research process on a global basis, regardless of whether they invest in South Africa only, or globally.

Access to and growth in tracker funds means that investors can remove one level of uncertainty from their portfolios.

They can also be more specific in what they pay for, i.e. they can separate paying for market returns and outperfor- mance. This is an opportunity for truly active managers to provide welcome diversification alongside a passive component.

In South Africa, compared to 20 years ago, we now have more depth – a larger number of larger investable companies, many of these with a global footprint.

says by and large, the demise of the defined benefit pension funds in favour of the defined contribution funds has been a mo- mentous shift. With the rise of the defined contribution funds, there has been a change in the way funds are managed.

Twenty years ago the funds were managed within the mind set of corporate executives, meaning there was less competition and the funds were moderately to conservatively managed.

Today, there are proliferation of funds with their own trustees demanding services, performance and investment returns. Trustees, who used to be fairly risk averse, are now more streetwise and demand more transparency and more competitive returns.

Fund managers have had to adjust to meet these new demands.

Trustees have become more knowledgeable, have a broader skills-set and are more informed. This is ultimately better for the end investor.

However, there is a negative side as trustees can have unrealistic expectations and may focus on short-term returns instead of long-term performance. Alida Jordaan, portfolio manager at OLD MUTUAL INVESTMENT GROUP’s MacroSolutions boutique says whereas data and information could have been a competitive advantage years ago – with bigger asset management firms having their own libraries – it has become commoditised with electronic data instantaneously available right across the globe.

Even the man in the street can watch the Federal Reserve’s chairperson on TV in the comfort of their own home. With the industry having access to electronic data and information the environment has become much more competitive.

“There were certainly many more conglomerates 20 years ago than today. Think of the days of Anglo American with, among others, Mondi with Tongaat Hulett in their stable, Barloworld with PPC and other conglomerates like Gencor and CG Smith.

“This is in line with the notion that companies over time have improved at being more transparent and displaying better corporate governance. In the same vein, almost all listed companies these days have regular results presentations and annual reports have become much “bigger”, with disclosure improving meaningfully.

Governance has also been stepped up with much more focus on companies’ ESG responsibilities, such as proxy voting for example. Considering this development, companies have become more aware of shareholders and are treating shareholders fairly – with maybe less focus on the controlling and big shareholders only.

Announcements via SENS have become the order of the day, as opposed to notices in the newspaper. Among these are trading statements – including profit warnings – which of course also contribute to improved transparency.

Huge growth has been seen in the unit trust industry over the past 20 years, compared to when AUM was closer to R10bn in the early 1990’s.

This, of course, has recently culminated in the establishment of many “wealth” operations. In contrast, some of the asset management firms of two decades ago are not around anymore such as Southern Life, Norwich, UAL, BoE and Syfrets.

In addition to South African companies such as Naspers globalising, foreigners have become more interested in our local market, so much so that more than 40 percent of our market is owned by foreigners.

This has changed the dynamic and local managers have learned to wear a foreign hat.

While a quantitative approach might have formed part of the screening process of many managers years ago, more quant managers have emerged.

A quant approach has a good chance of being successful, however it becomes more challenging in volatile markets and turning points.

Talking about volatile markets, one of the more recent dynamics has been the impact of hedge funds on the market place. Whether this contributes to volatility remains debatable, but there are some market participants who believe that this is the case. All in all these changes over time have made the job of active fund management more challenging but also more rewarding.

says foreign exchange liberalisation has probably been the biggest change we have experienced over the last 20 years, with retirement funds now allowed to invest 25 percent offshore.

This has allowed diversification that was previously unavailable, including access to different currencies, growth regions and industries not represented on the JSE.

South African pension fund returns have been significantly boosted in Rand terms by this change. As a South African fund manager, if you don’t have access to a credible offshore investment platform, you would be seriously disadvantaged in this new world.

Indeed, global issues, economies and markets have become far more relevant to the South African investor and market. We used to be far more inwardly focused, whereas these days global markets are so highly correlated that managing South African funds means you need to be very alert to global events.

Technology has played a big role, as we have moved away from long rolls of ticker tape at the JSE and the open outcry board to having live global data via Bloomberg.

The days of receiving stock broker research in paper form are long gone, which means that information is far more quickly distributed.

This does mean that it is far harder to get truly ‘away’ from the market. We also tend to bracket South Africa far more firmly within the emergingmarket cluster of countries now than before, rather than considering it only on its own merits.

Continuing with the ‘internationalisation’ theme, we have witnessed some of our largest bell weather companies effectively externalize themselves, being allowed to transfer their primary listings to London.

All of these are truly international businesses with a genuine need to access global capital markets. The fact that they have secondary listings in South Africa has meant that we do not have to use our foreign exchange allowance to access these companies.

Another big change has been the fall in the resources or commodity share weightings of the major equity indices. Finally, regulation and investment oversight and scrutiny have improved significantly over the last twenty years, with the FSB playing a very positive role.

Too often in the past blatant insider trading went unpunished, as it appeared that all you needed to be successful were well placed contacts and the offer of a long boozy lunch.