A study of the independent / boutique asset management industry in South Africa. November 2016

Transcription

1 + A study of the independent / boutique asset management industry in South Africa November 2016

2 1 Notes : See appendix for sources, glossary of terms and definitions Significant number (126) of boutiques in the SA market: 126 independent / boutique asset managers who manage ~ R2.4trn of assets under management ( AUM ), representing 47% of the SA total asset management industry of ~ R5.2trn. This compares to roughly 45% in the US and 41% in the UK. High concentration of AUM amongst the top 10: The top 10 of the 126 independent / boutique asset managers manage approximately 76% of the independent / boutique industry AUM, compared to 46% in the UK, suggesting scope for the next generation of boutique managers. New business flows to independent / boutique managers continues to rise: When looking at ASISA unit trust flows independent asset managers have (in aggregate) attracted nearly 4 times the net inflows over the past 3 years as their bank/insurancelead competitors. Independent / boutique managers outperform benchmark huggers : When looking at Morningstar and Alexander Forbes Large Manager Watch performance numbers for the independent / boutique industry, they have outperformed their bank/insurance owned peers by ~2% p.a. over the last five years. Much of this research was undertaken to understand the characteristics of the SA independent boutiques that help deliver this outperformance.

3 We have chosen seven different characteristics to exhibit the make-up of the independent / boutique asset management industry: 1. Size: 65% of the industry manages less than R5bn AUM, a critical level for shareholder profitability and client credibility. 2. Type: 63% of the industry are long-only managers (active and passive) leaving a relatively high percentage of hedge fund managers, attracted by the higher fee structure and greater mandate flexibility. 5. Ownership type: 86% of the industry are independent (no significant ownership or influence by an outside shareholder or distribution partner outside of the investment team). We see a rise in the number of partnerships as boutiques try to grow their business to remain relevant. 6. Investment team shareholding: 69% of the industry have equity ownership >50% by the investment team, possibly their single biggest alignment with clients as it indicates 1) skin in the game and 2) autonomy Primary asset class focus: 62% of the industry has equities as their primary asset class reflecting institutional client s high use of equity building blocks, and the low fees in fixed income. 4. Level of Focus : managers with <R50bn have considerably more focus on a smaller fund range with a single investment team improving the chance of fund outperformance. 7. BEE: Black-owned asset managers manage approximately R400bn (4.5%) of the total SA savings industry of R8.9tn (Source: ASISA), or 7.6% of the SA asset management industry of R5.2 tn (RMI IM estimate)*. These firms manage 16% of the independent / boutique asset management industry assets of R2.4tn (RMI IM estimate).

4 Independent asset managers represent approximately 47% of the total investment and savings industry AUM Independent asset managers AUM; 47% The top 10 independent asset managers (by AUM) make up approximately 76% of the independent / boutique industry assets Significant players in the SA market: Independent / boutique asset managers manage ~ R2.4trn of AUM, representing 47% of the SA total asset management industry of ~ R5.2trn. This compares to roughly 45% in the US and 41% in the UK. The South African independent/boutique asset management landscape is still fairly underpenetrated if one considers the fact that only a handful of managers dominate the independent asset management industry in terms of AUM. The independent asset management market has a big concentration among Coronation, Allan Gray, Prudential and Foord whereas the market in the US and UK is more fragmented. High concentration of AUM amongst the top 10: The top 10 of the 126 managers managed approximately 76% of the independent / boutique industry AUM. This indicates that the remaining 116 independent / boutique managers manage only R578bn or ~11% of total industry AUMIn the UK, the top 10 of the independent managers oversee c. 46% of the independent industry AUM. Excluding these top 10 managers, the independent industry manages roughly 22% of industry assets. Of the top 10 managers in the UK (by AUM), only 2 are considered to be independent. 3 Top 10 independent asset managers; 76% Notes : See appendix for sources, glossary of terms and definitions

5 Share of 12-month rolling unit trust net flows Independents vs rest 100% 75% 50% 25% Independent/boutique asset managers experienced nearly 3 years of successive higher net inflows whereas the bank/insurance-lead asset managers have not managed to gain meaningful traction as far as net inflows are concerned. In aggregate, independent/boutique managers gathered nearly 4 times the inflows compared to bank/insurance-lead managers over the past 3 years. It is worthwhile noting that although bank/insurance-owned asset managers own c. 50% of industry assets, they are only able to capture 20-25% of industry net flows. 0% 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 Independent asset managers Bank/insurance-owned asset managers Source: ASISA Note: Independent Managers include Allan Gray, Foord, Coronation, Prudential, Truffle, Rezco, Prescient, 36One, Visio etc. 4

6 12-month rolling unit trust net flow (R'bn) If one takes a closer look at the net flows to independent asset managers, it is clear that boutiques ( Challengers which include managers such as Visio, Truffle, 36One, Prescient, Rezco etc.) have been the clear winners. Contenders (managers such as Nedgroup, Prudential and PSG) have also been able to secure net inflows but this trend has been waning over the past few quarters. FICA (Foord, Investec, Coronation and Allan Gray) have been suffering declining net inflows over the past 3 years as the majority of inflows have been channelled towards boutiques Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 'FICA' 'Contenders' 'Challengers' Source: ASISA FICA : Foord, Investec Coronation & Allan Gray Contenders : Prudential, Kagiso, Nedgroup etc. Challengers /boutiques: Truffle, Rezco, Prescient, 36One, Visio etc. 5

7 OVERALL ACTIVE PERFORMANCE IN SA HAS NOT BEEN GOOD, BUT SA HEDGE FUND INDUSTRY HAS BEEN IMPRESSIVE 49% 44% % of active funds beating their benchmarks 63% 37% 24% 36% 25% 19% 16% 1-year 3-years 5-years South Africa US Europe South African vs global hedge fund returns 13.7% 12.5% 5.6% 5.0% 4.8% 1-year 3 years 5 years -1.0% HedgeNewsAfrica Equity Long Short Composite (ZAR) Eurekahedge Global Long Short Equities Index (USD) Over a 3-year and 5-year investment horizon, South African funds tend to fare slightly better than their international peers as South Africa has a higher % of funds beating their respective benchmarks. Over a 3-year period 37% of South African active funds have beaten their respective benchmarks which is in line with Europe (36%) but better than the performance of US mutual funds where only a quarter have been able to outperform their benchmarks. South African hedge fund performance has been considerably better than international peers with ZAR returns 7-8% higher than the international (USD) returns of their peers. Even after considering South African hedge fund returns in USD these funds have still managed to outperform international peers. Source: SPIVA, HedgeNewsAfrica, EurekaHedge 6

8 INDEPENDENT / BOUTIQUE AVERAGE RETURNS HAS BEEN BETTER THAN THE REST OF THE INDUSTRY Average performance of institutional multi asset portfolios (as per Alexander Forbes Large Manager Watch) 10.2% 15.5% 15.6% 13.1% 13.6% Performance of South Africa Multi Asset High Equity funds (retail unit trusts) 11.9% 10.4% 14.3% 12.5% Independent managers of institutional funds have, on average, returned roughly 16% per annum over a 3-5 year period; outperforming their bank/insurance-owned peers by at least 2% per annum. The same trend of outperformance by independent managers can be observed among retail unit trusts where independent/boutique managers recorded returns of 12-14% per annum of a 3-5 year period compared to peer group returns of 10-12% over the same period. 8.0% 6.0% 5.2% At the 2016 Raging Bull awards it was very noticeable that nearly half of all the awards for South African domiciled funds went to boutique managers (e.g. Rezco, Truffle, Abax, Prescient, 36One etc.). Institutional Retail 1-year 3-years 5-years Independent managers Bank/Insurance-owned managers 1-year 3-years 5-years Independent/boutiques Peer group median Independent managers Allan Gray, Coronation, Foord, Prudential Allan Gray, Coronation, Foord, Prudential, Rezco, Truffle, 36One, Visio, Prescient Source: Morningstar, Alexander Forbes Bank/insurance-owned managers Nedgroup, OMIG, SIM, Stanlib, ABSA 7

9 Size / AUM 8% 65% of the independent / boutique asset management industry in South Africa (by number of firms) manage less than R5bn. Only 8% of firms manage > R50bn. 17% 10% 32% <R1bn R1bn-R5bn R5bn-R10bn R10bn-R50bn >R50bn AUM of R5bn is seen as a critical level, particularly for a long only asset manager, in order for the business to become profitable and for larger clients to take the firm seriously. This suggests that the majority of independent / boutique asset management industry in South Africa is below this threshold, suggesting that some kind of consolidation and / or failure of smaller firms is likely. 33% Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions 8

10 Type of manager 63% of the independent / boutique asset management industry in South Africa by number of firms are long-only asset managers (active and passive). 6% 6% Long only Given the higher fee structure of hedge funds as well as the greater level of investment mandate flexibility (and thus ability for the fund manager to express their views) has made the hedge fund model attractive to startups, resulting in a high number of hedge fund managers in the SA market. 25% 63% Hedge fund Private Equity Other alternative While the private equity industry (~R170bn of AUM) is roughly 2x the size of the hedge fund industry (~R70bn of AUM), much of the private equity industry assets are run by in-house private equity firms (e.g. RMB ventures, Old Mutual private equity) whereas hedge funds are almost all independent. Given the length of a fund cycle in private equity (typically 7 years), the time taken to establish a track record makes startups very difficult in private equity, likely contributing to the lower number of independent / boutique firms. Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions 9

11 Primary asset class focus 1% 62% of the independent / boutique asset management industry in South Africa (by number of firms) have active equities as their primary asset class focus. 11% 5% 21% The same is true when comparing the long only industry to the hedge fund industry equity managers dominate in both. There is a relative dearth of independent fixed income boutiques in SA. 62% Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions Fixed Interest Equity Multi Asset Property Commodities This is a function of: 1. Higher fee structures in equities vs fixed income. 2. An institutional bias to the independent / boutique client base (most have little retail presence) who have a high weight to active equity managers. This would also explain why multi-asset focus is small amongst this group of managers despite being a big portion of unit trust assets in SA. 3. Much of the investment talent in the independent / boutique industry have broken away from larger, often inhouse/captive asset managers where they manage equity portfolios. 10

12 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Level of focus among asset managers 98% 93% 93% 80% 30% 0% 2% 7% 7% < R1bn R1bn - R5bn R5bn - R10bn R10bn - R50bn > R50bn Bank/insurance owned managers 20% 70% > 50% in multiple strategies managed by a single investment team > 50% in multiple strategies managed by multiple investment teams 100% Overall, independent boutiques are more focused than bank/insurance owned managers. This focus is one of the factors that we believe contributes to the superior investment performance of independent asset managers compared to bank/insurance owned asset managers. This is a key theme of the research conducted by UK affiliate manager Northill (see appendix). Independent asset managers become less focused with increased size. As assets grow in different strategies (e.g. different products and different asset classes), the cohesiveness of the single investment team starts to dilute. In addition to the declining alpha opportunities due to larger AUM(need to focus on larger cap and more liquid stocks), we believe that the reduced focus due to size is also a contributing factor for the superior investment performance of many smaller managers over larger managers. Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions 11

13 Ownership type 14% Independent Semi-independent 86% of the industry participants are independent that we define as having No significant ownership or influence by a shareholder or distribution partner other than the management team. 14% of the industry are semi-independent that we define as having Some level of significant ownership or influence by a shareholder or distribution partner other than the management team but where the ownership / influence is not at a high enough level to be deemed in-house/captive. e.g. Prudential SA, Peregrine Capital, Denker Capital, Capricorn, Aluwani. 86% This is one of the key strengths of this industry (no/minimal interference from a majority shareholder) but given the difficulties in growing a small boutique into a successful asset manager, we see a rise in the number of partnerships (through ownership or distribution relationships) by independent boutiques. Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions 12

14 Investment team shareholding 69% of the independent / boutique asset management industry in South Africa (by number of firms) have majority (>50%) equity ownership in the business by the investment team. 53% 5% 26% <25% <50% 50% - 75% 75% - 100% This is another key attribute / strength of the industry in that the investment team has significant skin in the game and have autonomy as to how to run the business. It creates the best alignment with clients. In many instances, however, independent / boutiques do have a non fund management team shareholder, often who was the capital provider / seed investor or a management team member who is not part of the investment team (e.g. CEO, COO) when the business was started. 16% Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions In other instances, the independent / boutique manager introduced a subsequent shareholder where the firm was looking for a strategic partner (e.g. BEE, distribution partner, capital partner) or where a generational change in the business means that that founders are still significant shareholders but no longer part of the investment team and their shares were sold to a strategic investor. 13

15 29% BEE non-bee 37 out of the 126 boutique managers as per our proprietary research are black-owned asset management firms. That is, approximately 29% of the asset management firms are black owned. According to our research, black-owned asset managers manage approximately R400bn (4.5%) of the total SA savings industry of R8.9tn (Source: ASISA), or 7.6% of the SA asset management industry of R5.2tn (RMI IM estimate)*. These firms manage 16% of the independent / boutique asset management industry assets of R2.4tn (RMI IM estimate). The assets per manager are more thinly spread in black-owned asset management firms than the rest of the industry. 71% The perception of black-owned managers being young remains. However, whereas the average age of black owned firms is nearing 7 years, there are at least 14 managers with track records in excess of 10 years. Low barriers to entry, difficulty in breaking into the mainstream gatekeepers and lack of representation within the retail space has meant there s a large tail of new managers which may contribute to the high % of firms that are BEE but not (yet) the high % of AUM. Note: The above split is done in terms of the number of managers (total 126), See appendix for sources, glossary of terms and definitions * The R5.2tn is RMI IM estimate of the size of the direct SA asset management industry. Our estimate adjusts the ASISA number of R8.9tn (total household savings in SA) downwards by excluding internally managed assets by life companies,assets managed by multi-managers, other large pension funds that manage a portion of their assets internally and any foreign assets that are managed by offshore asset managers. We corroborate this estimate with Alexander Forbes estimate of the SA asset management industry of R4.4tn (excl. multi-managers) as at June

16 APPENDIX A: + Research, views and opinions of offshore affiliate managers investing in boutique asset managers 15

17 Affiliated Managers Group research piece 2015 RESEARCH BY AMG SHOWS THAT BOUTIQUE ACTIVE INVESTMENT MANAGERS HAVE OUTPERFORMED BOTH NON-BOUTIQUE PEERS AND BENCHMARK INDECES OVER THE LAST 20 YEARS Boutiques have outperformed large managers by average annual 51bps in institutional equity categories Boutiques delivered 141bps average annual net excess returns vs. indices EM Equity Global Equity US LC Value US LC Growth US LC Core US MC Value US MC Growth US MC Core US SC Value US SC Growth US SC Core EM Equity Global Equity US LC Value US LC Growth US LC Core US MC Value US MC Growth US MC Core US SC Value US SC Growth US SC Core Source: AMG report titled The Boutique Premium Do Investment Managers Create Value?,

18 INVESTORS ARE INCREASINGLY RECOGNISING THE ABILITY OF BOUTIQUE ACTIVE MANAGERS TO OUTPERFORM BOTH NON-BOUTIQUE PEERS AND BENCHMARK INDICES Core characteristics that position boutiques well to consistently outperform in return-seeking asset classes (active equities and alternatives) include: Alignment of interests: direct equity ownership ensures that key principals have a vested interest in the long-term success of a boutique. Investment-centric: a boutique has an investment-centric organizational alignment, typically geared to a distinct investment philosophy (e.g., value-oriented with strong focus on purchasing securities below their intrinsic value) with a highly focused investment process (e.g., bottom-up stock picking). Multi-generational management: the presence of a multigenerational management team, including a succession plan, is another core foundation of a boutique. This ensures that key principals will continue to remain motivated and highly involved in business development. Commitment to building an enduring franchise: key principals are committed to the long-term growth and success of a boutique, often signalled by their willingness to sign multi-year employment agreements. 17 Entrepreneurial culture with partnership orientation: key partners control the daily operations of a boutique and are actively involved in business planning and building an enduring franchise. Source: AMG report titled The Boutique Premium Do Investment Managers Create Value?, 2015

19 KEY RESEARCH FINDINGS Focused active managers outperformed generalist managers Focused active managers outperformed even in the most efficient markets The benefits of focus are evident across multiple asset classes Focused active managers added more on the upside and lost less on the downside Focused active managers can help investors avoid mistaking luck for skill Focused active managers have helped investors avoid the worst underperformance outcomes The average focused active manager outperformed its benchmark after fees Source: Northill Capital report titled Nowhere to Hide, Focused active asset managers outperform, August

20 MAIN CONCLUSIONS DRAWN FROM RESEARCH Key characteristics of the typical focused active manager vs. the typical generalist managers Typical focused active manager Typical generalist manager No single factor can be relied upon by asset owners to define their search criteria. Sustainable sources of alpha generation, disciplined repeatable investment processes, stable teams and firm culture are all key determinants of an asset manager s ability to deliver superior long-term outcomes for asset owners. Investment team is the largest function Collegiate, team-orientated culture Marketing and support teams are the largest functions Star managers with key man risk and succession issues Research suggests that investors who appoint asset class and investment style specialists strengthen the alignment of interests with the manager and hence maximise the probability of achieving their investment objectives. Sensitive to capacity limits May be inattentive to capacity limits Concentrated, low turnover portfolios with high active share Simple business models with low operational risk Temptation to closet index Complex business models with high operational risk Source: Northill Capital report titled Nowhere to Hide, Focused active asset managers outperform, August 2016 Focused on investment performance May be too focused on asset gathering 100% of management time and attention spent on a single investment strategy Multiple distractions and limited skin in the game for key decision makers 19

21 + APPENDIX B: Sources, Glossary of Terms and Definitions 20

22 Sources: AUM: RMI IM own research, ASISA, Alex Forbes Large Manager Watch, SAVCA, company websites and factsheets (MDDs), Towers Watson Top 500 largest Asset Managers, Morningstar, The Investment Association (UK), Novare BEE: RMI IM own research Investment team shareholding: RMI IM research Asset class split : RMI IMG own research, ASISA, Alex Forbes Lage Manager Watch, Morningstar, SAVCA, company websites and factsheets (MDDs) SA asset management industry size : ASISA 2015 annual review, Alexander Forbes annual survey of retirement fund managers 2015, NMG. The R5.2trillion is RMI IM estimate of the size of the direct SA asset management industry. Our estimate adjusts the ASISA number of R8.9 trillion (total household savings in SA) downwards by excluding internally managed assets by life companies,assets managed by multi-managers, other large pension funds that manage a portion of their assets internally and any foreign assets that are managed by offshore asset managers. We corroborate this estimate with Alexander Forbes estimate of the SA asset management industry of R4.4tn (excl. multi-managers) as at June SA independent / boutique industry size : RMI IM research Glossary of terms: Other alternative: An alternative asset class strategy that is not a hedge fund or private equity. Examples include infrastructure, mezzanine, unlisted credit. Definitions: Independent / Boutique asset manager: Any asset management firm in South Africa that does not have a majority shareholder which is either a bank, insurance company or other distribution linked entity. We have included only businesses where direct asset management of the underlying asset classes and securities in the fund is their primary business (often referred to as single strategy managers). As a result, we have excluded : Advisor funds: Any IFA or other advisory firm fund of fund that has their own discretionary funds under their own Cat II discretionary asset management licence of where they are a Cat I licence holder utilising another entity/manco s Cat II licence. Multi-managers / fund of funds: Any fund of funds or multi-manager business where the asset manager s primary business is the selection of funds managed by other asset managers and not the direct management of asset classes and securities inside the fund. In-house / captive asset managers: Any asset manager that is majority owned and/or branded and/or controlled by a parent company where one of the asset manager s primary roles is to manage funds for the parent company. BEE: Any asset management firm that has a significant BEE component to their business through a combination of black shareholding and black investment professionals. Long only vs hedge fund vs private equity: Where an asset manager manages a combination of these types of strategies, we have classified them based on their primary business focus e.g. 36One is classified as a hedge fund Equity vs fixed income vs multi-asset : Where an asset manager manages a combination of these asset classes, we have classified them based on their primary asset class focus e.g. Kagiso is classified as an equity manager. Independent vs semi-independent: The best way to explain this is through examples : Independent: No significant ownership or influence by a shareholder or distribution partner other than the management team e.g. Coronation. Semi-independent: Some level of significant ownership or influence by a shareholder or distribution partner other than the management team but where the ownership / influence is not at a high enough level to be deemed in-house/captive. e.g. Prudential SA, Peregrine Capital, Denker Capital, Capricorn, Aluwani. 21

23 Independent / boutique asset manager 36 One Consilium Capital Mianzo Tantalum Abax Coreshares Miton Optimal Taquanta Acumen Capital Coronation MSM Property Terebinth Capital Advantage Creditsmith Mvunonala Tower capital Aeon Crux Newfunds Trendline Afena Denker Capital Nimble Tri-alpha African Merchant Capital Dibanisa Nitrogen Trident capital All Weather Capital Eau Rouge NorthStar Truffle Allan Gray Electus Oakhaven Umthombo AlphaNaut capital Element Oasis Visio capital Alt Re Ethos Obsidian Capital Vunani Alusi Evolution Africa Odyssey Capital Wealthgrowth Aluwani Fairtree capital Ora Worldwide capital Anchor Capital First Avenue Pan-African AM Xchequer (XFM) Ant Hill Capital First Global Pan-African Private Equity Argon Florin Parasalene Capital ASOC Foord Peregrine Capital Ata Capital Four Oaks Perpetua Atlantic Green Oak Polar Star Autus Gryphon Praesidium Aylett Imara Prescient Balondolozi Inspired evolution Prowess Barack JM Busha Prudential SA Bataung Kadd Re:CM Bateleur Kagiso Rexsolom Benguela Kaizen Rezco Blue Alpha Kura Capital Saffron Wealth Brunia Capital Laurium capital Salient Quants Cachalia Legacy Africa Satori Cannon M3 Satrix Capricorn Maestro Sentio Catalyst Marble Rock Sesfikile Cayor Capital Maru Southeaster Centaur Matrix Stonewood Chrysalis Mazi Capital Steyn Capital Cloud Atlas Meago Stylo Clucas Gray Medu Sunstrike Capital Colourfield Mergence Sycamore Capital Community growth Metope Sygnia 22

24 + THANK YOU Any questions?