Investors in South Africa turn to emerging trends to make money
The asset management industry continued its unprecedented growth trajectory in 2021, with global assets under management (AuM) rising by 12% to $112 trillion, significantly above the 20-year growth average of 7%, according to a new report by Boston Consulting Group (BCG).
Net flow rates were also at record levels, at 4.4% of total AuM. The Middle East and Africa (MEA) also enjoyed record levels of growth, with AuM rising by 14% to $1.5 trillion. By contrast, South Africa lagged with 5% growth to $190 billion – below the 10-year average.
The report, titled Global Asset Management 2022: From Tailwinds to Turbulence, is the 20th edition of BCG’s annual study of the industry and indicates that the forces driving the asset management industry are shifting, unlocking new opportunities and potential for disruption.
Globally, strong performance in equity markets has been the key driver, representing 90% of revenue growth between 2005 and 2021. During the same period, revenues from net flows have been largely offset by investors shifting their asset-class mix toward lower-priced products and ongoing fee pressure.
Yet despite rising costs, operating profit margin rose to a healthy 38% in 2021, up from 36% a year earlier, as average AuM growth outpaced the increase in costs.
“The incredible market run that has fuelled the performance of the asset management industry over the past 15-plus years has been a double-edged sword,” said Arjan-Tim Ferweda, partner at Boston Consulting Group, Johannesburg.
“While it has provided strong tailwinds for the sector, it has also allowed the market to be dominated by legacy products that benefit from the compounding effect of returns on underlying assets. However, there are signs that these trends are beginning to shift, and the ensuing turbulence is an opportunity as well as a challenge for industry players.”
Tapping into today’s trends
This shift is becoming clearer in South Africa and the broader MEA region – particularly in terms of the growth of the retail investor landscape. Although institutional clients remain the largest client group in line with global investment markets – accounting for 59% of total South African AuM – retail AuM growth outpaced institutional AuM growth during 2020-21.
This follows an emerging global and regional trend, where retail investors have become one of the most important sources of capital.
Global net flows from retail were 6.6% in 2021, significantly higher than the 2.8% from institutional investors. In the MEA region, AuM relative to growth in 2021 was 8% retail and 3% institutional.
In South Africa, insurance is the biggest contributor to AuM on the institutional side, while Unit-Linked Pension Plans (ULPP) is the largest product type on the retail side, followed by Mutual Funds. Retail Mutual funds saw a high double-digit increase in 2020-2021.
“Asset managers have been able to tap deeper into the retail segment as technology has made it economically feasible to serve clients of all sizes,” said Ferweda.
“Retail clients now receive data-driven personalisation advice, fractional shares, and streamlined interfaces that charge low fees or no fee at all. As new technologies make it possible to expand retail services further still, asset managers should expect to be faced with new opportunities and disruptions to the way they do business.”
What winning in the future looks like
Other emerging trends expected to shape the future include an increasing shift of portfolios into alternative assets in the pursuit of higher returns compared to publicly-traded markets. Alternative products represented less than 20% of global AuM in 2021 but constituted more than 40% of total asset-management revenues.
This trend is expected to continue over the next five years, with revenue from alternatives forecast to grow to more than half of all global revenues in the industry by 2026.
And, with $100 trillion to $150 trillion in capital deployment required to reach net-zero goals by 2050, demand for sustainable investments represents an opportunity that will dominate the sector in both the short- and long-term.
Roughly $20 trillion to $30 trillion is expected in bond and equity allocations for asset managers, much of it frontloaded over the next few years as more investments flow into climate-transition projects.
South Africa is also expected to see greater investments flow into projects with a sustainability focus.
“Like other regions, it’s critical to have a clear sustainability/net zero strategy because investing in a sustainable fashion or only offering Environmental, Social and Corporate Governance (ESG) products won’t be successful in the long run,” said Ferweda.
South Africa can learn from regions like Australia and Europe, which are leading in terms of asset managers known and trusted for their clear sustainability strategy and implementation, the report’s authors said.
However, South African asset managers will have to overcome additional challenges such as restrictions on international investments and a unique starting point for sustainable investments.
“While many asset managers globally started sustainable investing with restricted lists and disinvestments, this won’t work for South Africa.
“As a major part of the economy is in industries like mining, disinvestment will have a negative impact on the economy and the country at large. For South Africa, the focus should be more on investing in and supporting companies with important transitions like the energy transition,” said Ferweda.
Finally, new technologies such as direct indexing are putting the core value proposition of asset managers at risk of disintermediation by simplifying the manufacturing and packaging process—which enables new participants to enter the market and build personalised products that they can take directly to their clients.
This is especially the case for wealth managers, leading to a growing convergence between the asset- and wealth-management industries, which are both beginning to chase the same asset pools.
“The asset management industry is at a tipping point as the market enters a new and more turbulent era,” said Ferweda. “The future presents multiple opportunities and the firms likely to win are those that develop strategies to adapt to the changes that lie ahead and begin preparing for industry disruption now.”
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