Honesty is the best growth policy

The South African investment industry is facing challenging times and has battled to overcome the challenges that were left in the wake of the recovery from the global financial crisis (GFC).

Speaking at the 2018 Sanlam All Access Summit, all the speakers referred back to this statement and pointed out that this should not be surprising to anyone. 

Yet, the challenge that faces investors is that they need to find a way to overcome the challenge that is associated with this statement so that it does not become a prophesy that defines the industry for many years to come. 

Complicating the matter

There are several challenges that need to be resolved as a matter of urgency if the investment industry is going to provide the returns to South Africans that will allow them to retire more comfortably than the current climate does. 

“One of the challenges that investors need to manage is that longevity is becoming a major issue and it is something that needs to be addressed when we manage client portfolios,” said Gielie de Swardt, Head of Retail Distribution at Sanlam Investments. 

Another challenge we are facing is that the nature of the investment industry has changed. “Asset management has evolved. The GFC has forced the industry to take a step back and relook at its business models. Returns in all asset classes are currently suppressed and there is no guarantee that they will return to normal levels,” said De Swardt. 

Key themes

De Swardt said that while the challenges facing the industry are significant, they can be overcome with innovation and hard work. 

He added that these challenges can be grouped under four main themes. 

The first theme is getting enough overperformance from active fund managers. There is growing dissent among clients when it comes to paying high fees and seeing muted returns. Active fund managers need to become more assertive and get the returns that are promised to clients. 

The second theme is that fund managers need to help maximise fee budgets. In the past, you could either invest actively, or passively. There was very little space for doing both. However, De Swardt points out that an effective investment strategy needs to incorporate elements of both active and passive investment management. 

The third theme is that alternative forms of investing are having a major impact on the industry. Diversification is driving this and is assisting clients to find alternative ways to generate a return. Bonds and cash were always seen as safety nets in portfolios while equities and commodities took centre stage. The roles have been significantly reversed in the past where bonds and cash are currently proving to be very popular.  

The fourth theme is that data analytics will be an important driver of the industry going forward. “A complex space such as investing requires competitive insights. This can only be done through proper data analytics,” said De Swardt. 

Knowledge is power

While De Swardt feels that the industry’s challenges can be grouped into four key areas, financial literacy is a major challenge that needs to be addressed on its own. 

The investment industry is complex and clients often do not understand all of the nuances of what makes up a specific portfolio. 

However, clients don’t need to know all these nuances. They just must know enough to manage their expectations. Kingsley Williams – Chief Investment Officer at Satrix – feels that clients need to know all forms of investing is active. 

“There is no such thing as passive investing,” said Williams, “all investing is active, even if you are just tracking the index. You are making a conscious decision to invest for a rainy day and the action of investing is in itself active.” He added that there is no cost associated with belonging to an index; clients pay fund managers a fee to track the index. 

This may be confusing and will need to be explained to clients in a way that will help them understand what drives the industry without confusing them. 

Editor’s Thoughts:
The investment industry is an important driver of the economy. While challenges do exist, De Swardt and Williams pointed out that these challenges can be resolved. It is now about being patient and assuring clients that the industry is thriving. Is this easily achievable in challenging times? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.