30 April 2021
BOUTIQUE ASSET MANAGERS SUPPLEMENT
Is the asset management industry primed for consolidation and what does this mean for boutiques? BY KEVIN HINTON Director, The Collaborative Exchange
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n last year’s MoneyMarketing Boutique Investment Management Survey, I wrote about fee and margin pressures across the industry, insurance companies acquiring assets and wealth managers, vertical integration of wealth and investment management businesses, and the fact that the asset management industry was a crowded space – by this, I mean that there is excess manufacturing capability. Headlines across the world in 2020/21 have reinforced some of these principles – ‘M&A in 2021: Asset Management primed for consolidation’ and ‘Merger mania sweeps asset management industry’. According to a leading US investment bank, “Only half of the fund industry’s current asset management companies will exist by 2030.” These are very bold predictions. We all know that the developed world is not always a proxy for South Africa, but we have also seen a number of interesting transactions occur in the local landscape: 1. Laurium Capital acquired 100% of the equity of Tantalum Capital, which was previously owned by staff and RMI Investment Managers. According to Laurium, the deal was to “strengthen the combined efforts of the teams across multi-asset portfolios, with an emphasis on global equities and fixed income”. 2. Following Counterpoints merger with RECM, it also announced the acquisition of Bridge Fund Managers. With Bridge’s ‘payers and growers’ strategy, combined with Piet Viljoen’s ‘contrarian’ value and Sam Houlie’s valuation-based investing, it brings together ‘scale’ and a multiboutique offering. 3. Franklin Templeton, who has a presence in South Africa, announced its acquisition of Legg Mason, creating the world’s sixth largest independent company in the world. These deals are possibly complementary to the acquirers and provide added scale
to these businesses. One could argue that the level of corporate activity is insufficient relative to our market size, but our fragmented market is also constituted by so many other factors. In South Africa, we still have over 1 800 unit trust funds on offer, while the JSE has seen a flurry of de-listings in recent times, bringing the number of shares listed on our local exchange now to only 442. Many funds in South Africa are ‘legacy’ funds and some of these are sub-scale and have very little assets in them. The industry would be well advised to reduce this clutter to increase operational efficiency. At least 2020 has brought about some relief to fund managers who have been struggling with scale and competition, as asset values have risen sharply over the past few months. However, it is my view that the following longer-term market dynamics will be in play for both boutiques and large fund managers in South Africa: • Sustained alpha generators will set themselves apart through a unique edge in investing and consistent outperformance of benchmarks and peers. Many fund groups are criticised as being ‘index huggers’, with no meaningful areas of differentiation. • Vertically integrated distributors will continue to leverage their control of the full value chain to capture flows. This will give them privileged access to end investors or permanent capital through fund platforms (LISPs) and wealth management/agency sales force arms. • Solutions providers will offer value through delivering on investor’s longterm complex investment needs, such as liability investing or outsourced Discretionary Fund Management services. • Ignore indexation/rules-based investing at your peril. While in South Africa passive flows remain at about 10% of industry net flows, this is not the case internationally. Vanguard and BlackRock were the world’s bestselling fund managers globally in the first half of 2020. According to renowned advertising executive Jonathan Perelman from BuzzFeed, in today’s modern world “Content is King, but Distribution is Queen, and she wears the pants”. Fund management groups would be well advised to consider this statement. Without effective distribution channels and access to growing asset pools, scale will inevitably be unattainable and industry margin compression (mainly driven by passive competition) will force further industry consolidation.
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The fund that turned
R1m into R100m BY ALAN YATES Business Development, Peregrine Capital
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t Peregrine Capital, our overarching goal is to create wealth for our clients. As an asset management business, this is the essence of our existence, and we have spent the past 22 years working to achieve this. December 2020 marked a special milestone for the High Growth Fund when it became the first fund in South African history to achieve 10 000% return for investors since its inception. This means that R1m invested on 1 February 2000 would be worth more than R100m today. The goal of the High Growth Fund has always been to deliver exceptional returns to investors, and as such, it is the fund with the most equity market exposure in our hedge fund stable. The net equity exposure in the fund is typically between 60% and 80% and is therefore very comparable to funds in the multi-asset high equity category. Over the past 21 years, the average fund in the ASISA South Africa multiasset high equity category has given investors an annualised return of around 10.3%. The High Growth Fund has delivered more than double that at 24.9% per annum. This sort of long-term record is not something that can be achieved by simply swinging for the fences and assuming excessive risk. In fact, it can only be achieved if risk management is a cornerstone of your process. Loading up on risky bets might give a fund an exceptional once-off return, but ultimately it will sink the ship at some point on the journey. Our process always values consistency and predictability of outcomes over great short-term returns. In the 21-year life of this fund, we haven’t had a drawdown of even half the biggest drawdown on the JSE. Over the fund’s life, the fund’s maximum drawdown has been 17% vs 40% for the JSE Capped SWIX. That for us is a key measure to look at, because lower drawdowns and volatility make for much happier investors. Achieving great returns on their own is not enough. They need to come with exceptional risk management as well. Managing the risks well also makes it that much easier to generate great returns. By managing our portfolio risk well in March last year (the High Growth Fund was down 1% vs 16% for the JSE), it made it much easier for us to post a good net annual return of 17% when the JSE managed less than 1% in 2020. While 100x capital is an achievement that we are certainly proud of, it is more a by-product of our investment process than a goal we set out to achieve. More than anything, it shows the impact of the compounding of returns over an extended period. It highlights the importance of investing for the long term and sticking with a manager that can deliver sustained returns through the consistent application of a tried-andtested investment process. We are committed to applying those principles with renewed vigour for the next 20 years, so that we continue to deliver exceptional future returns for our clients.
