Edition: March / May 2017
Editorials

ASSET MANAGERS

Battle for consensus

There’s a parliamentary inquiry into transformation of the financial sector. Sibongiseni Mbatha, president of the Association of Black Securities & Investment Professionals (ABSIP), puts under pressure the bigger established asset-management firms.

Here's how:

When ABSIP talks of “transformation”, what meaning do you ascribe to the term for the asset-management industry?

Mbatha: Transformation is about inclusion. It’s about creating a normal society that’s equal across the full asset-management industry value chain. This chain includes the full distribution channel from asset consulting to asset management to compliance, administration and product platforms. At present, a normal and equal SA society is not reflected.

Instead, the industry is dominated by a handful of significant players. They have long-entrenched advantages and therefore greater access to capital and resources. Such benefits make these businesses stronger, thus allowing the playing field to remain unlevel. The financial sector needs to transform so that there’s full participation by all players, including those who haven’t previously enjoyed similar advantages.

By what yardsticks have you selected the lines of demarcation between what compromises acceptable and unacceptable transformation? How would you counter the argument that they’ve been arbitrarily contrived by self-interest?

Our members are predominantly black people. Their interests, and those of our organisation, are about achieving inclusive, transformative and sustainable above-average economic growth for the benefit of all South Africans.

We do not have a discourse on what is acceptable and unacceptable transformation. There is only one kind of transformation. Any other form is not aligned with our vision. In any economy, there will be people who abuse a process of change to promote self-interest. If there are such people in ABSIP, they’re on the fringe and not representative.

The slow pace of change in the SA industry is not as a result of ABSIP members driving self-interest. It could rather be argued that the slow pace arises from the established organisations pushing their self-interest.

Are you unhappy with the recently-revised draft of the Financial Sector Charter? If so, what further changes do you consider necessary?

Mbatha . . . redress required

We broadly support the FSC good-practice codes. In fact, we helped in the alignment of these codes with the generic B-B BEE codes and Act. We’ve also been instrumental in devising an innovative Black Business Growth Fund to address shortcomings in the ownership element of the FSC. This initiative could mobilise R25bn-R100bn to help the funding of black businesses.

There are certainly shortcomings in the recently-revised FSC and we may have failed to identify gaps in its code of good practice. Compliance is voluntary, yet it is essential that retirement funds become signatories.

The FSC council has been slow to produce its 2014-15 annual report on progress of transformation in the financial sector. We’ve expressed our displeasure and also argued that the 2013 report was a whitewash in that it excluded important published industry survey data on the lack of transformation. The council has been dragging its feet on getting further in-depth studies on each element of the FSC scorecard and codes. Such studies are needed for the sector to deal with blockages and facilitate progress.

Where do the interests of clients feature in your scheme of things? Is there a risk that clients’ choice of asset manager, to decide with whom they feel most comfortable in handling their money, might be overridden by the transformation criteria you seek?

Categorically, clients’ interests are paramount. This is at the core of the industry. There’s no argument that clients – trustees of pension funds, asset consultants and multi-managers – have a fiduciary duty in deciding what’s best for their retirement funds.

But there is argument that historic relationships and narrow perceptions do drive decisions on the selection of service providers. Experience over the past 40 years is that clients have predominantly become familiar and most comfortable with the longer-standing players. This perpetuates the status quo.

It’s unclear why some clients might fear that selecting a more inclusive and representative asset manager could come at a cost to investment returns. The potential to be a skilled or below-average asset manager lies not in the race or gender of the asset manager but in competence and experience. These qualities reflect in performance where measurement is objective and publicly available.

However, where the playing fields aren’t level, asset managers who’re black have a far lower exposure to potential clients. This limits their opportunity to prove themselves and demonstrate their outcomes. In the public domain there is more than sufficient data to show that skin colour is irrelevant to the manager’s ability. Black managers can under-perform just as white managers can.

The larger and more established asset managers, which comply with B-B BEE requirements, have spent many years developing reputations that attract clients. They also have critical mass that allows them a variety of advantages e.g. superior resources for investment research, IT infrastructure and critically also the capacity to recruit young black professionals for upskilling and promotion. What are they doing wrong?

They developed these reputations during an era when the industry was far less competitive and these players were structurally advantaged. This head-start in development of capital resources and employee skills derives from apartheid. B-B BEE legislation was put in place to redress the imbalances of the past to achieve an inclusive economy.

Big business and big asset management players have successfully mobilised their machinery to achieve high B-BBEE ratings because they have the wherewithal to do so. It’s unfair to compare their ratings with those of organically-grown post-apartheid black firms.

The bigger firms must transform not just by applying the soft elements of the B-B BEE code but also focus more on the employment of key black professionals in senior and junior decision-making positions, especially in money management.

Should these firms also subscribe to the notion that a more competitive and transformed financial sector - representing the country’s demographics – is essential for all businesses, their objectives would be the same as ours.

Is it possible to create a more level playing field by advantaging smaller firms without disadvantaging larger firms? If so, then how? If not, then to whose benefit?

Yes, it is possible. It is about understanding that a level playing field does not restrict any specific player from competing. Instead, it opens access to more players and removes historic advantages that were unfairly gained.

The 2015 BEE.conomics survey by 27four shows 33 firms that meet its criteria as black-owned. Cumulatively they have R309bn of assets under management. But the high degree of fragmentation is illustrated by an average for the 33 firms each holding under R10bn and the largest of these firms holding over 30% of the total. To enhance the competitive position of such small firms, shouldn’t they be looking to some pretty wide-scale consolidation? Mightn’t this strengthen their competitive capacity more than attempts to derive business from the fact of being black-owned?

Consolidation and fallout are inevitable when one has high levels of competition. It’s evolutionary that there are now high numbers of black firms, given where individual black professionals are in their career cycles. Many founders of black firms would have started in the industry 20-25 years ago. They’ve been reaching a time when they have experience, track records, accumulated capital and personal brands to start on their own.

If you look back 15 years, this was the exact case with a flurry of white investment professionals who started their own firms. Many of those firms don’t exist today. The decision of owner-managed firms to consolidate rests with the ability for each individual firm to persevere and survive until they reach scale. Accordingly, it’s likely that we’ll see some consolidation for business reasons.

Finally, please say something about asset consultants. As gatekeepers for the allocations of pension funds’ assets, presumably they have service levels and fiduciary duties uppermost in mind. Do you feel that black-owned firms are getting fair attention? If not, what reasons would you attribute?

The latest research by 27four and other surveys indicate that asset consultants and multi-managers have not sufficiently been putting forward black-owned firms on the basis of capability. There would be several reasons.

First, asset consultants are typically not remunerated by a percentage based on the size of the fund. So they appear to have no incentive for assessing something new, especially something smaller, because it will take more hours of work. The safe option is for them to put forward what’s been tested and proven. It’s time-efficient for them to concentrate on monitoring the managers they’ve previously recommended.

Second, fund trustees need to play a much more active role in ensuring that they’re exposed to broader lists of potential managers. But they rarely ask consultants why new managers aren’t being proposed, and they’re inclined not to query the consultants’ selections.

Third, there’s a sense that asset consultants believe black-owned firms need only be considered for “transformation allocations”, not mainstream allocations. This would reflect a view that merit is compromised when diversity is pursued.

There’s much to be corrected.