Performance Attracts Assets

Performance Attracts Assets

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Unit trusts have become so ubiquitous that it is easy to lose sight of the fact that it has been a fast-evolving, and remains a rapidly changing, industry.

Today’s behemoths such as Coronation and Allan Gray were start-up firms two decades ago (Coronation opened its doors in 1994 and Allan Gray was only a small firm with R6 billion to R7 billion assets under management in 1998) compared to the likes of Old Mutual, Sanlam and other insurers. However, questions are being asked about their bulk today and whether it prevents them from achieving their historical outperformance.

Is size the enemy?

If they’re investing such huge volumes of capital — can they outperform the market? If not, would an investor be better off either investing in a passive index-linked fund which offers the market, or a smaller asset manager that is still nimble enough to access all the opportunities presented by the market?

Coronation agrees that size is the enemy of the active manager, and says that if you allow your business to become too big, you will ultimately disappoint your clients. However, the company does not believe that it is there yet.

The company says that despite significant growth in assets under management in recent years, its equity base as a percentage of the JSE’s free float is still only a modest 4%, which is not markedly different to what it was five years ago.

It points out that over this period, it has delivered some of the best outcomes in the industry. As an example, over the five years to end-January 2013, its flagship equity fund, Coronation Top 20, is the second-best performing general equity fund out of a total of 55 funds.

 

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However, to stabilise its size relative to the JSE at current levels, Coronation took active steps in 2012 to close three of its core institutional mandates (SA equity, balanced and absolute return) to new investors to protect the integrity of its commitment of delivering superior performance for existing investors.

Shift to smaller asset managers

David Polkinghorne, managing director of Grindrod Financial Services, which has a private client asset management division, believes that things may be about to change: “At the moment, big institutions by default place their money with Coronation and Allan Gray, as they did 20 years ago with Old Mutual and Sanlam.

This tends to go in cycles, where an asset manager gets so big all it can effectively accomplish is to buy the index or take massive stakes in individual companies.

“The top performing sectors – such as listed property – are too small for them. I expect to see a realignment of funds into the R10 billion to R50 billion sector, with some mergers among smaller asset managers, which are under enormous regulatory pressures,” he says.

The smaller asset managers are already benefitting. Polkinghorne says that last year Grindrod Financial Services’ assets under management swelled from R6 billion to R11 billion. “It’s an industry-wide trend.”

Monitor fund size

The problem is not the quality of fund managers in the large investment houses, but that the domestic market represents ‘a large inverted pyramid’ with as few as 20 listed companies representing up to 70% of the JSE’s market capitalisation, being fed upon by hundreds of funds.

“The bigger you become, the more you become a victim of your own success, being nibbled at by the smaller funds. They have no flexibility but to buy stocks in underperforming companies such as Anglo American or Implats, which they know will not perform,” says David Shapiro, whose Sasfin Value Fund won the 2012 Raging Bull Award for the Best Broad-based Domestic Equity Fund.

His advice to private investors: “It makes a lot of sense to look at a small asset manager.” However, the investor has to constantly monitor the size of the fund, “as it doesn’t take long for even a small fund to fall into the same situation”.

Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.