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SA investment industry straining to internationalise

Business Maverick

Business Maverick

SA investment industry straining to internationalise

The local asset management industry is under huge pressure to offer international solutions and to lower their fees while doing right for their clients. Recent moves by Coronation and Prudential reflect some of these pressures.

The ten-year bull run in international equities combined with the poor performance of the JSE over the last five years has resulted in a growing interest among South African investors in offshore investing.

This is putting pressure on local fund managers to provide international investment skills to their clients – which is no small ask considering there are 3,530 stocks listed in the US alone – before one counts Europe and Asia – relative to the 350 listed on the JSE.

In the face of this trend local fund managers, big and small, have adopted different strategies. Some, like Absa, Nedgroup Investments and Stanlib have partnered with global firms – Schroders, Veritas and Columbia Threadneedle respectively – which bring global expertise to the party.

Others like Coronation, Ninety One and Element Investment Managers have focused over many years on building an in-house capability, while some including Flagship, Rootstock, Northstar and Blue Alpha have concentrated almost exclusively on offshore investing.

Others are deliberately, and almost exclusively, focused on South Africa.

It is into this dynamic that a recent announcement by Prudential Investment Managers will almost certainly be welcomed by clients. 

The firm announced that it is now majority-owned by global asset manager M&G plc, which until recently held a minority stake in Prudential and maintained a largely arms-length relationship with it. 

The share transactions underpinning the deal are minor, but the significance is not, says Bernard Fick, Prudential SA CEO. 

M&G will increase its ownership in Prudential by 0.13%, from the current 49.99% to 50.12%, returning to a position of majority shareholder. This was enabled by Thesele Group, Prudential’s BEE partner for the past 14 years, which has decreased its shareholding marginally to 21.8%. 

Prudential will again become a subsidiary of M&G plc, and will in time change its name to reflect this.

This follows the demerger of M&G plc from life assurer Prudential plc and its separate listing on the London Stock Exchange. M&G has since focused on establishing a global asset management operation, with centres of expertise focused on the UK, Europe, the US and Asia. It made sense for M&G to seek closer ties with Prudential SA, which it established in 1994, to extend its investment expertise into Africa and other emerging markets.

“The increasingly globalised and competitive nature of the investment industry has meant that closer integration with our global parent company will be increasingly important for our ongoing success,” says Fick. 

The advantage, he says, is easier access to technological advances in investment management and administration, innovative new investment solutions such as in the areas of unlisted credit and ESG investing, and closer sharing of active investment ideas from around the globe.

As much as offshore investing is a trend locally, the reality is that the bulk of South African investors are invested in Regulation 28-compliant funds, which limits their offshore exposure to 30%, or slightly more if one includes the allowances for investments into the rest of Africa. 

In this regard a recent move by Coronation is noteworthy. It plans to lower its fees on three Regulation-28 compliant funds from April. This in itself is not unusual, the fees charged by active managers have been dwindling downwards for years in the face of growing competition from index-tracking funds, which require fewer people to manage and are thus cheaper.

In Coronation’s case the reduction is not to be more competitive (although that is always a factor) but to encourage a shift in investor behaviour, says Pieter Koekemoer, head of personal investments.

“Judging from investor behaviour multi-asset funds are the most hated unit trust category in the country. This category has seen 30% net outflows over the last five years.” 

The main driver, he says, has been the poor performance of the JSE which means the funds have not achieved their benchmark of inflation + 4%.

As a result, investors looking for a low-risk investment have moved into income funds, which have performed relatively well thanks to the interest rates. 

But this has changed. Despite the crazy Covid shocks to the JSE in March, Coronation’s Capital Plus and Balanced Defensive Funds which are lower risk, medium and low equity funds respectively, have performed to expectation. 

Normally investors would rotate back into them, Koekemoer says, but they have not. “Investor confidence has not returned, with investors choosing to remain in cash. We think there is now too much money in cash and asset allocation is too conservative.” 

So Coronation has dropped its platform fees on these funds. This was from 0.85% to 0.75% (P Class), and 1.25% to 1.15% (A Class), effective 1 April 2021 in a bid to tempt clients to make what Coronation feels is the correct decision.

It has also lowered the fees on its Strategic Income Funds – but for a year only.

This is for a different reason.

“Interest rates are historically low, which means returns on these income funds will be lower as a result. We want to align fees with performance – these are by far our most popular category for the average retiree,” he says.

However, this fee reduction is for 12 months only.

That’s because Coronation does not expect interest rates to remain at the current level. With inflation pressures rising, the SA Reserve Bank will be forced, at some point, to step in and raise rates.”  DM/BM

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