The landscape of assets

Confucius said, “Study the past if you would define the future.” On 25 March 2014 the Investment Solutions team presented a journey through time to show the evolution of the South African asset management industry.

Muitheri Wahome, head of technical solutions, took the audience through a whistle stop of the history of South African markets; Glenn Silverman, chief investment officer, addressed today’s challenges; and Chris Hart, chief strategist, predicted what industry players can expect in the near future.

Past perfect

Wahome quoted from Malcolm Gladwell’s book, Outliers: The story of success, that success is about being “at the right place at the right time”. The discovery of diamonds in 1870 and gold in 1886 leapfrogged South African markets onto the world stage. “SA has been a hotbed of innovation,” said Wahome. Apartheid in the 1940s caused capital control for years, and companies were unable to expand off-shore. 1882 saw the beginning of pension funds with the inception of the Transvaal Retirement Fund. “If you look at South Africa today,” she said, “We have a long heritage that supports us.”

That includes regulation. The King 1 code was borrowed from the UK and implemented in 1994, causing relentless change in the asset management industry.

She spent some time to stress the role of financial journalists in the 1950s at newspapers like Financial Mail and Rand Daily Mail. “The industry has grown because of all of us,” she said.

Present tense

Silverman has spent time in townships in Cape Town with trade unions and organisations. “It’s important that my team spends time in other asset classes. Once you’ve been in their office, you never forget the manager.” He said they see about 350 asset managers a year, of which 50% are in the global space.

Silverman and his team have committed to meeting managers in all the BRICS countries, the findings of which will be published in a book to be launched in August this year. They have found that the local industry is in good shape. General trends include: a more global focus of local asset managers, life companies making a comeback, staffing issues, regulatory impacts, and the effects on newer entrants or smaller players in the market.

Life companies are making inroads in Africa, with a strong focus on responsible investing. He said that the regulatory burden is especially tough on smaller player and new entrants, and that large asset managers are better equipped to deal with the changing regulatory landscape. He said there are fewer start-ups now than in the past, and this is because smaller players find it difficult to attract the best staff, and many investors follow performance or the best known brands.

Future… a mystery?

Chris Hart highlighted key factors influencing his expectations going forward.

  1. Compared historically and internationally, assets are expensive, but there’s still an open jury on bonds. We need to learn how to extract returns from expensive markets.
  2. Interest rates and negative real rates see companies starting off in the red. Quantitative Easing (QE) has eroded the value of currencies.
  3. Global governments raising debt to cover welfare has created systemic pressure on currencies, with consumption driving the debt binge, creating a liability in which more debt is perpetually needed. The global financial crisis of 2008 was a debt crisis, said Hart, and the solution was to raise more debt. Hart predicted another debt crisis to occur in the future, that will be bigger than the one in 2008 with more rates and QE.
  4. South Africa is seen as the gateway into Africa’s Financial Services sectors, thus, jurisdiction will become more important in the future. Investors will want to know how property rights are protected or undermined.
  5. Another factor is geopolitics. Hart sensed a newfound curiosity into global economies, and said if something globally disruptive should happen South Africa and Brazil are in good positions geographically and politically.

Not all emerging markets are equal, said Hart, and emerging markets have fallen out of favour in recent years. Focus will shift to frontier markets like Africa and other countries starting to mobilise from their third world position.

“One needs to be able to shift assets between asset classes, and find new asset classes,” said Hart. “In South Africa, the place to be is in passives,” he continued. Assets (cash and bonds) have intrinsic value, require confidence and are prime targets for value property and equities.

Written by Annetjie van Wynegaard