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AI in the wings as large managers go Level 1 on BEE

09 April 2024 Gareth Stokes

A survey of South Africa’s large asset managers confirms the industry’s significant progress in meeting its broad-based black economic empowerment (BEE) objectives, with 19 of the 20 largest managers measured by assets under management (AUM) now boasting Level 1 contributor status. On 30 June 2023, 51 asset managers had achieved Level 1 status compared to 49 in the prior year.

Empowering financial futures

The Alexforbes 2023 Manager Watch™ Survey of Retirement Funds Investment Managers offers key insights into the country’s asset management landscape.

 The latest survey attracted 87 participants who represented no fewer than 749 portfolios or strategies. “The dramatic increase in the number of strategies [has been] driven by the number of BEE mandates that have been added to the survey, [totalling 148], with BEE a constant theme throughout,” said Janina Slawski, Head of Investment Consulting at Alexforbes, during the launch of survey. 

The survey report was themed ‘Empowering financial futures’ with sub-themes on innovation in South African finance; retirement security; and investor education. The empowerment and transformation angles are being driven by both market participants and the regulator. According to Slawski, the desire among large managers to achieve Level 1 BEE status has contributed to a significant increase in AUM for majority black-owned firms. 

Going the extra mile for responsible investing

Large managers have shown a strong interest on living up to investors’ expectations under the broad environmental, social and governance (ESG) banner too. The latest survey showed that 69 of the 87 participants in the survey already ascribe to the Code for Responsible Investing in South Africa (CRISA), in effect since February 2012. And 59 survey participants said they were signatories of the United Nations’ Principles for Responsible Investment (PRI). “There is a significant cost involved in becoming a PRI signatory, and the reporting [requirements] are extremely onerous,” Slawski said. 

Having dealt with an industry overview, the presentation dipped into the ‘meatier’ survey findings under the asset allocation and return headings. Asset allocations for South Africa Best Investment View (BIV) strategies have been more-or-less ‘locked in’ since 2018, ending 2023 split across SA Equities (64.61%); SA Bonds (25.16%); SA Cash (5.98%), SA Listed Property (2.83%) and SA Other (1.42%). Slawski noted that the small allocation to ‘other’ confirmed limited appetite among managers for hedge funds and private markets. “Large managers are still very much focused on traditional listed asset classes within their South Africa mandates, she said. 

The impact of higher offshore limits

Asset allocations in the Global BIV strategies segment proved more entertaining, offering tangible evidence of how funds have repositioned offshore following the latest changes to asset class limits under regulation 28 of the Pension Funds Act. Large managers investing under the Global BIV mandate have reduced SA Equity exposure from 45.65% in 2018 to just 38.66% in 2023; over the same period, global asset class exposures have increased from 24.56% to 34.2%. SA Bonds (18.01%) and SA Cash (4.48%) remain at similar levels, while the exposure to SA Listed Property has declined from 5.13% in 2018 to 3.09% presently. 

The survey showed that 34 out of 45 managers in this category held more than 30% of AUM offshore, with 11 of the group reaching 40% or more. Whether this trend continues depends on investors’ and managers’ views of South Africa’s fiscal prospects. “Any concerns over how National Treasury and the South African Reserve Bank respond to fiscal challenges could see that 34.2% global allocation creep higher; the losers are the local equity and local bond mandates, and to some extent local cash,” Slawski said. An unintended consequence of these higher offshore allocations is that smaller managers without credible offshore capabilities struggle to compete. 

The good old ‘box and whisker’ plots

Alexforbes favours ‘box and whisker’ plots to illustrate asset class returns from the different strategies. These plots indicate the highest return, lowest return and median return alongside the range of first and third quartile performances. SA Equity showed a small return diversion over one year due to the market becoming more concentrated. “The JSE has seen a lot of de-listings recently, so this could become an ongoing trend of fewer opportunities and different returns by asset managers,” Slawski said. Stock picking capabilities remain essential. 

Turning to Global BIV, the boxplot showed an unusually tight one-year view. However, as more managers move closer to the 40-45% offshore limit, analysts expect extensive return diversion. “Whether asset managers get [their global exposure] right or wrong will see them either at the bottom or at the top of the return survey results,” Slawski said. The SA BIV is similarly skewed by asset managers’ exposure to SA Equities. “The allocation to equity versus bonds and local cash or listed property has a big impact over one year, and the dispersion stays wide even up to five-years,” she said. 

The big warning to financial advisers and your clients, and a message that gave this writer the cold sweats, was that the survey is pointing to reducing expected levels of return over time. “Nominal returns will continue to come down, and it is becoming more challenging for large managers to meet CPI-plus targets for their member,” Slawski warned. She said that funds would have to communicate with members to ensure they were making sufficient contributions to retirement savings given they could no longer rely on return to do the heavy lifting, as it has done in the past. 

Slow adoption of AI, machine learning

One of the interesting papers published as part of the latest survey focuses on how South Africa’s large managers are incorporating artificial intelligence (AI) and machine learning (ML) into their businesses. Two dozen asset managers were interrogated on their adoption of emerging technologies, with one-in-three admitting they had undertaken some level of AI and machine learning integration. 

The survey-within-a-survey revealed data quality, integration complexities and skills shortages as key constraints to more rapid and widespread adoption of these technologies. Two thirds of respondents said they were not thinking about using AI at the product level, opting instead to use it to enhance investment processes; but most survey respondents viewed AI and ML as enhancers of active management approaches rather than threats. Alexforbes noted that while the adoption of AI among local asset managers remained modest, the cautious approach indicated considerable potential for future growth in AI utilisation within the investment sector. 

Another paper bundled with the 2023 survey revealed that collaboration between asset managers and academia played a pivotal role in enhancing financial literacy among clients and students, providing invaluable insights for improved financial understanding. “As clients become more knowledgeable, they are better equipped to appreciate the expertise required by investment professionals to navigate the complexities of the investment landscape,” Alexforbes wrote. 

R500 billion gets you a top five ranking

The top five asset managers will have their work cut if they hope to meet consumer demands on AI; BEE; ESG; financial education; and, most importantly, investment returns over the coming years. At end-June 2023, the top five by AUM included Ninety One; STANLIB Asset Management; Coronation; Allan Gray; and Sanlam Investment Management, all boasting between R494 billion and R823 billion under management. The 10 largest managers managed just over 60% of the total assets participating in the survey. 

Writer’s thoughts:

The 2023 Manager Watch offered interesting insights into AI, BEE, ESG and financial education before discussing asset allocation and returns. Do your clients care about the big picture trends, or are they entirely focused on the return their investments generate? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

 

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