Edition: December 2015 / February 2016
Seems that the PIC is swinging its pendulum increasingly towards “emerging”
asset managers for alpha performance. There are two sides to this coin,
with pointers for pension funds in making selections.
In the developed world, the debate on whether investment performance is affected for better or
worse by the size of the asset manager tends to be
academic. Larger and smaller managers fight it out
from their respective corners. Clients choose the side
they prefer to believe. Past performance, efficiency of
systems and service, and execution of mandates are
SA, part of the “emerging” world, is different. Into
the mix are added such “developmental” priorities as
transformation, black economic empowerment and
encouragement of entrepreneurship. These aren’t
luxury options for a social shine. They’re integral to
the legally-sanctioned Financial Sector Charter that
embraces all asset managers. They carry force. Comply
Nowhere is this more apparent than in the 2015
annual report of the Public Investment Corporation.
Asset manager for the Government Employees
Pension Fund, which accounts for 89% of the PIC’s
R1,8 trillion in assets under management, it accelerates
the developmental processes on external asset
managers’ own businesses.
They compete robustly, and enviously, for slugs of
PIC appointments. In its latest report, the PIC doesn’t
identify those who’ve succeeded. But it’s clear that the
PIC has shifted its selection criteria. The higher that
an external manager ranks in its BEE compliance, the
better could be its chances of making the cut.
For instance, says the report, it must contribute
to enterprise development in the asset-management
sector both in listed and unlisted investments. Increasingly, it is looking to support “emerging black
fund managers”. Note the “emerging” qualification, by
definition separating them from the larger and more
established managers that boast varying degrees of
Lukhele . . . consider asset allocation
It also implies that BEE scorecard ratings, achieved
even at the higher levels by large managers, are in
themselves no longer sufficient. It doesn’t suggest that
they’re out of the running – they cannot be because
the investing of pension-fund monies requires the
capacity they bring to bear – but it does suggest that
the smaller black firms are being given a leg-up. In
the scramble, it wouldn’t be too surprising if some
consolidation of the smaller into larger is heralded.
So take head-on the contrasting views of asset
managers, one large and one small, on the pure
argument of whether size matters. First up is Sihle Lukehele of Foord Asset Management, one of the larger:
Investors and financial commentators frequently
differentiate between “big” and “small” asset managers.
This begs the question of what defines size. Once that
is answered, the question that follows is whether size
First, consider the measure of “size”. Is it assets
under management? Is it the number of products or
funds? Is it the number of professional team members
managing the funds? Should a fund manager with a
single, huge fund be classified as “big”? Equally, should
a fund manager with many little funds be classified as “big”? Does characterisation as a “boutique” equate to “small”, or something else?
Industry convention is a default to “assets under
management” (AUM) as a proxy for size. This seems
as good or bad a measure as any. At the least, it is
objectively and relatively easily ascertained and
commonly understood. However, AUM is a measure
of neither complexity nor scalability. It also fails to
address the key issue of investment capacity.
The real question is whether size affects
performance. Academic research is inconclusive.
Some studies show a complete lack of any
correlation between size and performance (i.e. there is no relationship between them); some show an
apparently more intuitive negative correlation (i.e. that
the greater a manager’s AUM, the worse its relative
performance); yet others show a positive correlation
(i.e. that performance improves with greater AUM).
These outcomes run the full gamut and don’t really aid
an investor’s manager-selection process.
The more relevant enquiry is the question of a
manager’s size relative to the investable universe.
Given the equity bias of most investment-management
operations, such analysis typically turns to the
manager’s size relative to the “free float” of the
predominant market exchange. The “free float” refers to the value of all listed companies’ shares that
generally trade freely (i.e. that are not held for the
long-term by institutional shareholders).
Where a fund manager has a particularly large sum
of equity investments relative to the market free float,
it will be more difficult to invest or disinvest at the
right price at the right time. In contrast, a smaller fund
manager is inherently more capable of investing or
disinvesting beneficially and timelessly without undue
The share market comprises both large blue-chip
companies as well as many smaller and medium-sized
listed companies. A fund manager with
enormous AUM relative to free float might need to
acquire almost all of the available shares in a smaller-capitalisation
company to make the stake meaningful,
or risk the investment being so small in its portfolios
that the stake becomes meaningless. A fund manager
less encumbered by size can add smaller-capitalisation
companies to its portfolios in meaningful size lots.
This brings us to another critical consideration.
The effects of size must be viewed through the prism
of asset allocation.
It is well established that in multi-asset portfolios,
including notably Regulation 28-compliant
prudential portfolios, much of the performance is
derived from astute asset allocation. The ability to
invest in asset classes beyond only shares (including
cash, money markets, corporate and government
bonds, commodity securities, currencies and in
other jurisdictions) heavily mitigates the challenges associated with size.
Govender . . . bigger universe available
Would a smaller asset manager disagree? Delphine
Govender, prominent in the Association of Black
Securities & Investment Professionals, heads Perpetua
Investment Managers. She puts it this way:
AUM as a collective is not the best proxy for size.
The real question is AUM per mandate or strategy.
A fund manager that has R400bn in AUM, with
75% in income assets and only 25% in domestic
equities, is smaller in terms of utilised equity capacity
against a R200bn AUM domestic equities-only
manager. The multi-asset class strategy by its nature
utilises a limited portion of the equity capacity of any
We agree that the relevant enquiry is the manager’s
size relative to the investable universe. However, we
do not believe that using percentage of free float is
the correct measure in the SA equities market. This is
primarily because a disproportionate amount of the
SA free float resides in a few large shares.
In fact, 10 shares account for nearly 60% of the
JSE’s All-Share Index capitalisation. Consider the chart
below. We have de-segmented the Alsi into batches of 10 shares per segment, ranked by median market
capitalisation per segment.
capitalisation of the smallest 87 shares is below $1bn.
Therefore, if a manager is too big in SA equities,
its ability to buy meaningful stakes in at least half the
market is mathematically restricted. Another way of
illustrating this is to ask: Given a manager’s equities
under management, how many shares can it own to at
least 2% of fund? Assuming that the most a manager
holds for each company is 20% of its issued capital:
(see graph above).
Once a manager is bigger than R100bn in SA
equities, the number of shares it can own to
at least 2% of fund falls to 100. Roughly 40% of
the universe would be too small. For example, the
10 largest range from PSG Konsult with a market
capitalisation of R9,90bn to Blue Label with R7,76bn.
Naturally, there are different permutations that
could make up a fund. So opportunities exist for
a large manager to buy a number of the smaller
companies. But the point remains that their stakes are
unlikely to be significant given the concentration of
the free float.
The size issue is therefore mainly relevant for a
genuinely active manager whose equity investment
objective is to deliver market-beating returns
over time; and who therefore will need to build a
sufficiently differentiated portfolio over time to deliver
This is not to be mistaken to mean that large fund
managers cannot add value. They can do so mostly
from the large shares. Mid and small managers have
the added advantage of being able to do add value
from smaller shares as well.
Ironically over the last few years, the return of the
JSE’s shareholder-weighted SWIX has actually come
from a few large shares. Thus the benefit of being a
more nimble manager has been masked.
The source of returns in terms of the size of
companies which deliver these returns varies over time.
So the ability for the genuinely active manager to extract
returns from across the market offers greater potential.
Smaller and mid-sized managers have a bigger
universe from which to select. They should be
sufficiently skilled to know when to use this additional