27four Investment Managers
10th October 2019
The race to be black: are the Top 20 running hard enough?
There is mounting scrutiny on asset managers’ willingness to transform – and on the progress they are making (the so-called “race to be black”). But how well are they really doing? And are they trying hard enough?
This is the eleventh edition of the 27four Annual Transformation in asset management Survey which, as always, focuses on majority black-owned, managed and controlled asset managers. Recently there has been considerable “evidence” suggesting that transformation practices are improving across the entire industry. So, in this edition we look at just how factual this “evidence” is.
Armed with detailed, wide-ranging research, here we give a snapshot of the transformation facts across our industry as they stand. To arrive at these facts, we gathered information on the change in transformation at the 20 largest asset managers in South Africa over the course of the last 10 years. The top 20 asset managers (classified by assets under management) cover some 90% of the total assets managed within the industry (source: Alexander Forbes Annual Manager Watch Survey, December 2018) making this a broad sample set. This data spans from December 2009 to December 2018.
Between them, the top 20 asset managers manage assets worth more than R6 trillion. They range in size from Investec Asset Management (with assets of almost R2 trillion) to much smaller players managing less than R50 billion.
So how has the asset management industry fared?
We look at the progress of transformation through various lenses. As our survey has consistently communicated, transforming a business is about more than merely increasing black ownership but also about skills transfer and the empowerment of previously disadvantaged individuals. The chart below provides an indication of how involved black individuals are in the investment decision-making processes within the 20 largest asset managers:
While the 20 largest asset managers have more than doubled their managed assets over the course of the last decade, it is encouraging to note that they have, on average, also more than doubled the total number of black investment professionals in their teams. This would seem to suggest an ongoing willingness and effort to improve skills transfer and continue to empower black investment professionals within the asset management sphere. (It could also be argued, however, that this data shows there is a great deal of room for more inclusive participation).
One of the implications of the trend displayed is that competition for good black talent remains fierce and it may continue to be an ongoing challenge for smaller, more niche, businesses to attract and retain high calibre black talent. However, what is undeniable is that the pool of talent is growing as more black professionals graduate into the profession from tertiary institutions.
Approaching the progress of transformation from a more traditional perspective, the chart below shows how black ownership (as well as B-BBEE ratings) have changed, again on average, within the top 20 asset managers:
The trend witnessed here is somewhat more disappointing. Although no doubt skewed by the Amended Financial Sector Code of 2017, there is no denying that material gains have been made on improving B-BBEE scores by the top 20 asset managers. On the other hand, there has been no notable increase in average black ownership within the grouping. This would seem to indicate that market participants have managed to improve their rating without necessarily making any real ownership changes.
Other elements of the scorecard, such as procurement, skills development and ESD, have enabled the companies studied to improve their scores without materially increasing black ownership. Some of the challenges faced with regards to improved ownership may well stem from the fact that a number of the large asset managers are listed, or form part of listed entities. Of course, there can be no compulsion as to who trades in the stock of such listed entities and so empowerment through ownership does become trickier. (This is in line with the trend witnessed in the latest Banking Association of South Africa’s report on transformation in the banking industry where the majority of banks improved their B-BBEE scores but did not improve their black ownership).
Royal Investment Managers is a majority black-owned (64.5%) investment holding company which is structured as a joint venture between RMI Investment Managers and Royal Bafokeng Holdings. The company entered the asset management industry by taking an equity stake in a number of asset management businesses over the course of the last three years. In doing so, to date Royal Investment Managers has acquired a 10% stake in Ethos Private Equity, 25% in Sesfikile Capital and 30% in each of Balondolozi Investment Services and Visio Capital.
At the time that Royal Investment Managers began acquiring asset-manager equity there were hopes and even expectations that, it would catalyse other black ownership transactions within the asset management sector. In order to test this, we quantified the change in black ownership levels at the top 20 asset managers over the past five years. The outcome of this analysis is presented below:
What is clearly evident is that the emergence of Royal Investment Managers in late 2016 did not spur wider transactional activity to grow black ownership at the Top 20 asset managers. In fact as demonstrated earlier black ownership levels has remained largely static.
Returns vs reform
The topic of transformation is a highly emotive one with many divergent opinions about the sustainability and even the merit of transforming an organisation. The debate is often about how transformation should be done in the most sustainable way to achieve the desired objective of greater inclusivity of previously disadvantaged individuals while ensuring business sustainability and the best possible returns for investors. To this end, 27four Investment Managers conducted an exercise in which we sought to understand the performance of companies with better transformation practices. In other words: was there really a trade-off between performance and transformation?
The B-BBEE ratings of all companies listed on the main board of the JSE were considered and a “B-BBEE Index” was created, adjusting the Capped SWIX index to account for transformation scores within the various businesses making up the index. Companies with a better transformation score were up-weighted within this index and companies with a poorer rating were down-weighted. The up-weights and down- eights to the Capped SWIX were limited to a deviation of no more than 5%. The outcome of the performance differential between the two indices is presented below:
What is evident from the above is that companies with superior transformation credentials have actually managed to deliver superior performance relative to the Capped SWIX. While the universe of companies available for analysis here is JSE-listed companies (which do differ in the objectives they pursue relative to an asset manager which seeks to deliver good investment performance) the thread of commonality is that transforming a business appears to have no adverse impact on operational capability. If anything, companies which have embraced transformation have demonstrated improved performance! This lends credibility to the thesis that good transformation practices make good business sense.