Alexforbes recently published its 2022 Manager Watch™ Annual Survey. The comprehensive survey covered 72 South African institutional investors and showed that surveyed industry assets under management (AUM) had increased from R3-trillion in 2010 to R6.7-trillion by June 2021. The Public Investment Corporation (PIC), which is not included in the survey, reports that it managed R2.34-trillion as of 30 March 2021.  

If you include the PIC, consolidate all the different asset management brands within each financial services group and ignore multimanager double-counting, then the largest 11 investment management groups account for over 81%, or R7.4-trillion of the approximately R9-trillion in institutional assets under management in South Africa. 

This is necessarily an imprecise exercise, but what cannot be denied is that AUM in the SA savings industry have shown steady growth and that the industry is relatively concentrated. It follows that the total market capitalisation of the JSE has grown too, which it has; however, the number of listed companies has fallen by more than 25% over the same period. 

These same 11 dominant institutions, which owe their significant success to the historical width, depth and diversity of South Africa’s public markets, are now quite unperturbed to describe all companies outside the largest and most liquid as “uninvestable”, or by the less pejorative alternative, as companies that “do not meet acceptable size and liquidity requirements”. 

We have reached a point where most of those responsible for more than 81% of all institutional funds in SA have washed their hands of companies with market capitalisations of below R11-billion or so — the approximate cut-off for the largest 100 companies. 

Not only have the local managers figuratively washed their hands, but they are tone-deaf enough to say so. Everything is about the institutional investors’ own growth, efficiency, scale and margins. If this means summarily writing off two-thirds of the companies on the JSE or refusing to even consider participating in smaller company capital raisings, for no other reason than their size and liquidity, then so be it. 

Add to this the 40% or so of local listed assets held by foreign institutional investors — the so-called hot money, which flows in and out of SA at the whim of international political and economic events — and the over-institutionalised nature of SA’s public markets becomes starkly clear. 

What of the retail investor, those South Africans lucky enough to have some discretionary savings? Are they not meant to pick up the slack? Many started their investment life as a client of an independent stockbroker, yet now find, without having moved their accounts, that they are a client of a private bank or a wealth manager instead. The wealth managers have deployed all their marketing guile, in headlong pursuit of a greater “share of wallet”, to persuade their clients that they are much better off in an index-benchmarked model portfolio, which essentially mimics those same institutional funds that invest only in the large and the liquid.  

Those clients who have resisted being asked to give up 1% or more a year of their savings for this model portfolio treatment and perhaps a further 0.75% or more a year for the financial planning advice, have been moved into self-service, no-advice, online secondary trading platforms. 

What does all this mean for the practice of investor relations for the “uninvestable”? It is here that the traditional investor relations triangle needs to be turned on its head. 

This starts by prioritising, rather than neglecting, the remaining retail investors.  

The “uninvestable” need to find a way to reach past the wealth management gatekeepers to connect with the remaining self-managed investors. The requirement for this is best illustrated in a recent informal survey of SA stockbroking clients, where just nine of the 95 respondents said they had been contacted by their stockbroker to participate in a new listing or capital raising in the last decade, despite the 184 new listings in the period where at least 90 raised capital on listing. The larger retail stockbrokers appear to no longer serve as an effective intermediary between individual investors and the institutionally “uninvestable” end of the stock exchange. 

What can be done? 

First, companies should embrace digital investor relations. They need to develop an appropriate social media strategy, take advice on how to create digital content and cultivate their relationships with financial and trade journalists who generate independent online content. Investor presentations and events should become professionally produced online webinars, and although all should be welcome to participate, the primary objective should be to serve retail investors, smaller institutions and the press. 

Second, companies need to reach smaller investors directly. Companies should work assiduously at signing up investors and potential investors to their own Popi Act-compliant contact databases and start managing direct communication with investors. 

“Uninvestable” companies should probably avoid the private banks and wealth managers who have not only shifted their clients into quasi-institutional model portfolios, but have also added a significant compliance layer that prevents the brokers on the trading desk from even talking to clients about stocks that have not been pre-vetted by an analyst and then approved by a committee. And very few analysts are going to venture outside the top 100 stocks. 

The “uninvestable” would also be well served to ignore the largest 11 institutional investors.  They are highly unlikely to ever invest in the “uninvestable”, regardless of the investment case. In the unlikely event that one of the large institutions does perhaps have an interested fund manager, then they will make contact. Just don’t wait by the phone. 

Companies should rather concentrate their institutional investor relations efforts on those institutions outside the top 11 that manage the remaining 19% of assets, including the regulated hedge fund industry. It is also often far better to spend an hour with an interested portfolio manager managing a R500-million fund than a junior analyst, with no decision-making powers, serving a team of portfolio managers managing R500-billion. 

The lack of analyst coverage is another problem to be addressed. The clients of the few remaining institutional stockbrokers are predominantly the same dominant 11 players, so any “uninvestable” company is highly unlikely to attract sell-side analyst coverage.

Companies should instead commission a research firm to prepare regular corporate-sponsored investment reports and should then distribute the reports via their database and website. Obviously, it must be stated clearly that it is paid research. What is important is that all the heavy lifting required to arrive at a valuation — a spreadsheet financial model with variable input assumptions and an editable cut-and-paste ready document in a standard analyst report format — is made available to potential investors, so that they can conveniently arrive at, and support, their own conclusions. 

The trajectory for SA’s public markets is becoming increasingly apparent — without some sort of policy intervention or disruptive innovation, the concentration of the local asset management industry will continue to increase, and the number of listings will gradually dwindle until most of the “uninvestable” have delisted. Only companies large enough to displace an existing member of the top 100 will consider listing — and the public market will no longer fulfil its societal purpose as a source of primary capital for growing companies.  

The best the “uninvestable” can do is to hope for that policy intervention or disruptive innovation and work to adjust their investor relations approach as best they can. DM/BM

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