A fragmented market is one where two heads are no longer better than one
For years, boutique asset managers were all the rage in South Africa. It was a unique little utopia compared with the rest of the world. Investors were spoilt for choice and there was more than enough to go around to keep all the mom-and-pop shops afloat. But times have changed. High fees and low performance are driving savings to index products in droves and red tape is choking the life out of the little guy. And it looks as if the consolidation of power has begun.
Former Allan Gray and Investec colleagues Piet Viljoen and Sam Houlie will soon again share office space. The boutique firms of RECM and Counterpoint Asset Management where they serve as chairman and chief investment officer respectively have recently announced their engagement after a nine-month courtship.
“Where fund overlap exists, funds will be amalgamated.”
“We share the same vision and consolidation makes sense. Combining assets and skills not only enhances our ability to deliver on our investment mandates, but importantly, scale also allows for an incremental reduction in costs to our clients, over time, says Viljoen.
“Intense competition and an onerous regulatory environment have resulted in increased margin pressure,” Viljoen says.
According to research done by RMI Investment Managers, 65% of the independent boutique asset management industry in South Africa manages less than R5-billion, with 8% managing more than R50-billion. This suggests that participants are unprofitable if a proxy of R5-billion is used for long-only manager profitability.
The 126 independent boutique investment firms manage R2.4-trillion of assets under management (AUM) — that’s 47% of the industry’s R5.2- trillion AUM. The top 10 firms manage 76% of the independent/boutique AUM. Without the top 10 firms, the balance of the industry manages R578-billion (11% of AUM), which is set to grow at the expense of larger participants.
“We believe that the even greater depth and reach resulting from our integrated teams, when added to the current compelling performance history in many of the fund offerings, will be of great benefit to all clients,”
Counterpoint’s current CEO Chris Stainforth will oversee the merger and will step down upon its completion. He formed the boutique suite with two partners back in 2012.
Houlie will lead the investment team, while Viljoen returns to his roots as portfolio manager of various funds.
RECM’s current managing director Linda Eedes will take over operations of the joint outfit.
As the meeting of minds and margins grow, so will the reward. Reviewing investment performance surveys (Morningstar and Alexander Forbes Large Manager Watch) reveals that independent boutiques delivered returns in line with or better than the industry average over the past three to five years.
Bigger fish are also biting. Rand Merchant Insurance (RMI) is gunning for Coronation, Investec and Allan Gray. Its new asset management business, RMI Investment Managers (IM), has taken minority equity stakes in these boutique asset managers, from which it hopes to secure a differentiated earnings stream while challenging the dominant managers.
RMI IM effectively wants to help boutiques become better and transform them from third-tier asset managers — each responsible for between R3-billion and R5-billion in AUM, it said in a media release.
It turned out to be a good thing that there is no official industry standard or definition of a“boutique” asset manager in South Africa because soon size will no longer matter, current references pointing to firms that don’t own a bank, insurance business or other distribution-linked entity associated with the asset manager. BM