Six themes that dominate investment decision making

Financial and investment advisers must keep a close watch on the themes and trends impacting the investment landscape this year. To find out what developments should take centre stage during client meetings, FAnews attended a ‘local and global economic themes and investment trends for 2024’ presentation by diversified financial services business, Alexforbes. The presentation identified six key topics that will define large manager sustainability and adviser-manager interactions over the coming 12-months.

That pesky local versus offshore debate

The first discussion point, and a dominant theme in the South African context, centred around the local versus offshore skew of large managers’ assets under management (AUM). Senzo Langa, Deputy Chief Investment Officer at Alexforbes said that despite having the freedom to move up to 45% of investors’ funds offshore, the average large manager ‘sat’ at around 35%. He said that the spread of offshore holdings ranged from 30% to 45%, and that this combined with differences in domestic and offshore return drivers resulted in dispersions in returns. 

Alexforbes recorded a wide dispersion in large asset manager performance in 2023. “There was an 8.1% difference between the top performer and the bottom performer; this level of dispersion is expected to remain [in place] going forward given the fact that managers can be more innovative in terms of their global exposures,” Langa said. This dispersion is on display as the sector’s offshore exposure slowly creeps higher, with average returns of 4.0% over five-years; to just over 6.0% over three-years; to 8.1% over the latest 12-months. 

The presentation offered a snapshot of mid- to large- asset managers based on how each brand accessed offshore markets including standalone offshore (example Allan Gray Orbis, Ashburton, Foord, M&G Investments and Ninety One); multi-manager or partnerships (Old Mutual and Sanlam); single manager outsource (such as Stanlib via JP Morgan); and managed from South Africa (36One, Fairtree, Matrix, Perscient, Truffle and others). According to Langa, there is a large contingent of local managers building their global capability from South Africa with these managers favouring offshore equities for growth. 

The passive money well is far from dry

The second theme discussed during the presentation was that passively managed investments continue to gather assets. Per data from Morningstar and the PWC Asset Manager Survey 2023, global assets under management topped USD115.1 trillion end-2022, split between actively managed (USD66.8 trillion); passively managed (USD30.3 trillion); and alternatives (USD18 trillion). “The biggest trend in terms of asset flows remains to the passive side; from 2018 to 2022 these flows practically doubled,” Langa said. Flows into alternative management methodologies are gaining traction too as investors seek return in private markets. 

There are quite a few sub-themes worth exploring under the ‘popularity of passive’ theme. One notable is the rise of global active Exchange Traded Funds (ETFs). According to Alexforbes, there has been a significant jump in the number of active ETF launched between 2020 and 2023: last year there were 116 pure passive versus 387 active ETF funds launched worldwide. “An ETF is supposed to be an index tracker whereas an active ETF seeks to outperform the index it tracks,” Langa explained. South Africa is behind the curve in this space with only around 1% of our ZAR148 billion ETF market being actively managed. 

Another notable sub-theme is the ongoing underperformance of active managers versus passive benchmarks. The latest semi-annual S&P Indices Versus Active (SPIVA®) scorecard revealed that 87% of US-based active managers underperformed the S&P 500 over a five-year rolling period ending mid-year 2023. South African active managers have fared somewhat better than their global counterparts, with just over half of active managers beating their benchmarks over one-, three- and five-years. 

Magnificent Seven trashes active manager returns

“It is important to have some empathy for global active managers,” cautioned Langa. Why? Because active strategies, by design, have ended up with low exposure to the main return drivers in US equity markets over the past few years. 

For those among you who have spent the last decade in a bomb shelter, the Magnificent Seven are a group of US-listed shares including Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla that today make up around 30% of the market capitalisation of the S&P 500 index. An active manager seeking to outperform the index would typically have lower-than-index exposures to these shares, missing out on their average 110% appreciation over the last 12-months. 

The third of six investment themes in focus in today’s newsletter is the ongoing consolidation among global large asset managers. Citing the PWC Asset Manager Survey, Langa noted that 75% of asset managers were in strategic conversation to further consolidate their businesses within the next two years. In recent months the focus has been on increasing exposure to private market opportunities, notably private debt. “The biggest managers, like Blackrock, are taking a position in that space [with] the main sub-theme being infrastructure,” Langa said. Over the next five-years analysts expect the AUM controlled by the 10 largest managers to rise from around 44% of global AUM to almost 50%. 

Local financial advisers will be familiar with the fourth theme discussed during the presentation, being the rise of discretionary fund managers (DFMs). Langa offered a simple explainer as follows: “A DFM is just an extension of an independent financial advice (IFA) practice function; you have an adviser who is very good at advising his or her clients and once the client’s advice needs are met, the adviser can transfer the investment management function to a DFM”. Over the past decade, the AUM in South Africa’s DFM segment have grown around four times, and the trend will persist as both adviser and client seek an investment management edge. 

On generative AI and investor relationships

The fifth and sixth themes that will influence large managers over the coming years include the adoption of artificial intelligence (AI) by the asset management industry and the ongoing consumer-driven focus on responsible investing. 

Large managers have been using AI for some time with one of the focuses being on trade execution. Other areas where AI is showing promise include portfolio construction and risk management. Langa pointed out that AI was being applied to speed up data-intensive decisions and that the technology has made significant inroads in the financial advice space due to the willingness among so-called Millennials and ensuing generations to transact online. Around USD2.5 trillion worth of US assets is currently exposed to some level of  robo-advice. 

AI is good at processing big data but is at risk of the so-called ‘rubbish in, rubbish out’ paradigm; it is also unable, at this stage, to identity Black Swan events. These points are somewhat moot because the big shift in AI-adoption among large asset managers will likely centre on using generative AI to interact with clients. “Generative AI can read text; it can access all news; it can read structured and unstructured data; and it can give you some sort of a sense as to where the market is,” Langa said, before handing over to a colleague to tackle the responsible investing theme. 

ESG and sustainability ‘out of focus’

This writer does not intend delving into the sixth theme beyond sharing the following insight from Gyongyi King, Chief Investment Officer at Alexander Forbes Investments. She pointed out that investors were struggling to keep the environmental, social and governance (ESG) and sustainability factors in focus in the context of inflation, interest rate hikes, performance of asset classes and volatility in geopolitics. Despite these challenges, ESG and sustainability remain “top of mind for all investment investors and asset managers”. 

Writer’s thoughts:

The SPIVA® statistics on active versus passive manager performances has triggered countless debates over the years. Do you have a view on active versus passive investment management? And how do you respond to clients who want to go all-in on ETFs or the new actively managed ETF craze? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.