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Four valuable lessons for investing clients’ savings

14 April 2021 Gareth Stokes

South Africa’s large institutional fund managers boasted assets under management (AUM) in excess of R6,225 trillion at the end of June 2020. Alexander Forbes recently released the 2020 Manager Watch™ Survey of Retirement Fund Investment Managers, which showcases the performance of 77 participating asset managers. The top six managers by AUM read like the who’s who of local investment brands and include Old Mutual Investment Group, Ninety One, STANLIB Asset Management, Sanlam Investment Management, Coronation and Allan Gray. A promising trend shown in the ‘Asset distribution to manager size’ graph is that the dominance of the top 10 managers is beginning to wane. These managers now account for around 67% of total AUM compared to 74% in 2015.

Resilience through adversity

The theme for the 2020 report was “resilience through adversity” as managers struggled to come to terms with the impact of pandemic and lockdown. “The onset of the COVID-19 crisis [underlined] various headwinds facing the asset management sector, including margin compression from slow growth in assets under management; rising operating costs; pressure on fees; and intense competition,” wrote Bev Bouwer and Muitheri Wahome of the Asset Management Research Institute. Their contribution to the Manager Watch ™ was titled A brave new world: The asset management industry after COVID-19. The industry has responded to the challenging operating environment through consolidation (through mergers and acquisitions) and exits. 

Is industry consolidation part of the answer? According to Bouwer and Wahome the pandemic will accelerate industry consolidation to the extent that many firms will need to grow assets under management faster than their underlying fixed cost bases; but they warned that mergers and acquisitions would have to be carefully considered. Asset managers with poor performance track records were predicted to come under increasing pressure as investors turned to top performing brands. “We are likely to see a flight to quality over the next 12 to 18 months as clients flock to those businesses seen as low solvency risks,” they wrote. Insurer-owned asset managers were singled out as benefitting from their financial adviser networks… 

The Manager Watch ™ offered a timely reminder of the four rules of investing that are as relevant today as they were in 1994, when the survey was launched. We list them in detail because they are gold to asset managers, financial advisers and investors. It makes sense to discuss these rules with your clients and to work them into your investing methodologies. 

Rule 1: Stay committed to your long-term goals

“Historical evidence reminds us that the gains experienced over the long term outweigh the losses experienced in the short term,” notes Alexander Forbes. “The fact that big price swings turns investing into a bit of a rollercoaster ride should not exaggerate the risk and uncertainty pinned on the anticipated long-term value of an investment”. It is easy to lose sight of this truth during periods of extreme volatility; but the recovery in equity markets following the March 2020 pandemic sell-off have proven this rule again. 

Rule 2: You cannot time the market

Trying to time the market is always going to be a difficult exercise. The 2020 Manager Watch ™ survey notes: “It has been shown that time in the market is more important than timing the market and that attempting to outsmart the market by determining when to switch between investment portfolios ends in missed opportunities or even losses”. Another major concern is that mis-timing of entries to, and exits from, the market only account for part of an investor’s underperformance. Those who sheltered in defensive assets, such as cash, would have been worse off than those investors who remained invested in shares throughout 2020. 

Rule 3: What goes down will go up

Equity markets have proven, time and again, that significant recoveries follow drastic downturns. The report notes that “investors who sold during the crash and sought safe havens in defensive assets would have experienced significant losses”. Those who remained invested beyond the duration of the crash easily recouped the notional losses suffered during the worst of the decline. 

Rule 4: Diversification is key

It is normal for long-term investments to come with some risk and market volatility: “A complementary mix defensive and growth assets does not only help investment portfolios to absorb market or economic shocks and participate in markets when they recover; but also help to manage investors’ comfort levels and crowd out impulsive behaviour when it matters most”. 

The rise of responsible investing

The global asset management industry is increasingly focused on corporate social responsibility (SCR) and environmental, social and governance (ESG) investing. The 2020 Manager Watch ™ made special mention of the local industry’s response to this trend, including the alignment of the Code for Responsible Investing in South Africa (CRISA) with the United Nations Principles for Responsible Investment (PRI). 

“CRISA and the PRI are codes that encourage companies to incorporate ESG issues in business decisions and investment processes,” said Janina Slawski, Head of Investment Consulting at Alexander Forbes. She said that 34 of the participating managers in the Alexander Forbes surveys were signatories to PRI, while 43 had adopted the principles and practice recommendations contained CRISA. 

We conclude with this newsletter with apt comment from Bouwer and Wahome: “Weathering the headwinds arising out of COVID-19 will contribute to building a financially sustainable and resilient asset management industry, which is good for clients and is good for South Africa”. It seems that South Africa’s large asset managers remain on track to serve the interests of both financial advisers and clients. 

Writer’s thoughts:
Reports covering the asset management environment force us to reflect on the sheer size of the industry measured by assets under management and by the number of participants. In today’s newsletter we mentioned that there were 77 large asset managers that participated in the 2020 Market Watch ™ survey. Are you concerned with the number of asset managers competing for your clients’ savings or is this level of competition essential for a healthy market? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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