Citywire’s South Africa outlook for 2021

For years, there has been talk of consolidation in the South African asset management industry. For years, little has happened.

In 2020, however, the first significant signs of movement started to appear. Counterpoint’s merger with RECM early in the year, followed only a few months later by its acquisition of Bridge Fund Managers highlighted how firms are looking to make deals.

The announcement in November that Laurium Capital had agreed to acquire Tantalum Capital reinforced this trend.

Boutiques under the spotlight

So far, activity has been limited to the smaller end of the market. It is boutique managers, inherently more likely to face questions about their sustainability, that are coming together.

The decision by Electus Fund Managers to close its doors at the end of June showed how the fortunes of smaller managers can change very quickly. The firm had a track record of more than a decade, but it found itself unable to see its business through a cycle when market conditions turned against its investment style.

It is therefore likely that the industry will see more M&A activity in 2021. Boutique managers looking for the security of scale, will continue to explore deals that put them on a firmer business footing.

What will be interesting to watch is whether this remains limited to this segment of the market, or whether some larger players will start to consider merger opportunities as well. This is the trend around the world, with medium-sized firms coming together in order to compete with the scale that the largest managers have established.

A tale of two trends

There is certainly scope for this in South Africa. The market remains highly fragmented. However, the question is not just whether the economics make sense, but whether there can be a meeting of minds that is so critical for any merger to succeed.

South Africa is also different in that the trend of the biggest managers just getting bigger is not playing out in the local market. In fact, the two largest firms – Allan Gray and Coronation – have been experiencing some significant outflows from their biggest unit trusts. Of the three large players, only Ninety One has seen net inflows into its flagship funds over the past year.

Five years ago, Allan Gray and Coronation had a combined market share of 25% in the local collective investment scheme industry, according to statistics from the Association for Savings and Investment South Africa. That has now fallen to 19%. Ninety One’s market share has risen from 8% to 10% over the same period.

It is, however, worth noting where significant market share gains have been made. Prescient, for instance, has doubled its market share from 2% to 4% in five years. This is at the management company level, so includes co-branded unit trusts. Boutique Collective Investments has seen similar growth.

Small enough, and big enough

The importance of boutiques in the market is therefore clearly growing. And, currently, there is no reason to suspect that it will stop, or even slow down. On the contrary, smaller managers continue to show the ability to out-perform in the local equity market in particular due to their wider opportunity set and ability to be more nimble in their allocations.

Those traits will only become more valuable if the number of listed companies on the JSE continues to contract, and so the boutique offering will only become more compelling. The challenge for these firms – as Nedgroup Investments MD Nic Andrew told Citywire earlier this year – will be to remain small enough to keep this advantage, but big enough to be successful businesses.

“There are enormous advantages to having nimbleness and agility,” said Andrew. “But there has always been a balance around being small enough to offer that, but large enough to be sustainable.

“We want flexibility. We want owner-managed firms. We want managers to be able to implement their views. But we don’t want them to be worrying about whether they can survive.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.