South Africa’s largest asset managers believe that further consolidation in the sector is inevitable as falling fees and stagnant savings force fund managers to buy out smaller players or merge their operations.
The chief executives of Ninety One, Coronation, and Stanlib told delegates to the inaugural INN8 Invest summit in Johannesburg last week that the moribund economy cannot support the number of fund managers in the country.
INN8 Invest is one of the country’s largest discretionary fund managers (DFMs), with more than R50 billion in retail assets under management (AUM).
Stanlib’s chief executive, Derrick Msibi, who heads a group with more than R600bn in AUM, said consolidation will affect asset managers and DFMs.
His views were shared by Hendrik du Toit, the chief executive of Ninety One, South Africa’s biggest asset manager with about R3 trillion in AUM. He said high operating costs were also likely to spur consolidation.
The industry will “definitely” see more consolidation, said Anton Pillay, the chief executive of Coronation, South Africa’s fourth-largest asset manager, with AUM of R623bn.
He said the challenges facing the industry include a market that is not growing and “exceptionally poor” savings levels. The country’s anaemic economic growth and high levels of unemployment prevent new savers from entering the market, while the death and retirement of older savers result in outflows from the savings pool.
Stringent regulation adds to the asset management sector’s costs. Asset managers are also faced with a shrinking number of listed entities in which to invest because of the numerous delistings from the JSE in recent years.
The cost of running asset management firms is outstripping inflation as a result of rising employment costs, while technology costs have increased because of the rand’s weakness against the dollar.
Last month, Rand Merchant Bank (RMB) said it expects the South African fund management industry to shrink further in the next five years, with companies managing assets of less than R10bn most at risk of becoming economically unviable in a tough trading environment.
Isabella Mnisi, RMB’s sector head for asset management and funds, said the number of asset managers is expected to shrink by 3% over the next five years.
Inn8 Invest executive De Wet van der Spuy said South Africa has more than 500 registered asset managers, but most have AUM of less than R10bn.
Mergers have risks
Pillay said mergers and acquisitions have a high implementation risk when it comes to retaining clients and staff.
“Companies are driven by people, and at the end of the day, the most difficult thing to do was to integrate the people,” he said.
Msibi warned that M&A has a high failure rate, saying it was “quite tough” to integrate people-related businesses.
Du Toit said the merger of two weak businesses does not work.
“To say we are going to merge ourselves to success is not possible,” he said. “We’re going to work ourselves to success. We have got to lower our cost base and make sure we use technology and other things properly.”
He said the industry must “deliver a value proposition to clients to survive”.
The sector is under pressure globally
The pressures that are forcing asset managers to merge are not unique to South Africa.
PwC’s “2023 Global Asset and Wealth Management Survey” stated that 16% of asset and wealth managers globally are expected to be swallowed up or fall by the wayside by 2027, twice the historical rate of turnover.
The survey found that 73% of asset managers are considering a strategic consolidation with another asset manager in the coming months to gain access to new segments, build market share, and mitigate risks.
Firms are also turning to technology to transform, with more than 90% of asset managers already using technological tools (including big data, artificial intelligence, and blockchain) to enhance investment performance.
Asset managers had a difficult 2022, with global AUM falling to $115.1 trillion, nearly 10% below the 2021 high of $127.5 trillion. This represented the greatest decline in a decade.
The survey found that inflation, market volatility, and interest rate movements are the biggest concerns for both investors and asset managers over the next 12 to 24 months.
“Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic, and geopolitical disruption,” said Olwyn Alexander, PwC Ireland’s global asset and wealth management leader.
“The choice is simple: adapt to the new context or fail. Firms that effectively leverage technology such as generative AI and robo-advisors, build meaningful inroads to new and existing customers, diversify their recruitment, and deliver exceptional client experiences will be well positioned to not only survive, but thrive,” Alexander said.
