Corporate and investment bank Rand Merchant Bank (RMB) has warned that asset managers with less than R10 billion in assets under management (AUM) are at risk of becoming economically unviable in a challenging economic environment.
Business Day quoted Isabella Mnisi, RMB’s sector head for asset management, as saying that the number of South African asset managers is expected to shrink over the next five years.
The trend of consolidation seen in recent years will continue with the industry facing multiple headwinds where size has become vital for survival.
RMB expects the assets of smaller firms to move to larger asset managers looking to grow through acquisitions.
“The local asset management industry continues to face severe challenges, not least stalling economic growth, policy uncertainty and growing negative sentiment towards South African companies,” Mnisi said.
“We expect that much of the future consolidation is likely to come from asset managers with AUM of less than R10 billion as they are simply too small to be economically viable.”
In South Africa, consolidation is not the only challenge the industry is experiencing, as investment trends are undergoing significant changes.
In particular, asset managers are looking to invest in local infrastructure, private equity, and offshore investments for greater returns.
“In South Africa, 65% of the money has been invested in locally listed equity. Investors are now looking to an area of the economy where there is growth and prospects for returns are good such as alternative assets — and particularly infrastructure-related assets,” Mnisi said.
“Infrastructure funds will be a long-running investment theme for South Africa as they attract more money as the country focuses on the urgent economic and social infrastructure needs.”
This benefits larger asset managers as they can leverage their existing skills and the significant capital they manage.
Smaller asset managers will not be able to compete effectively in this space since they do not have the capital or skills to invest in large, long-term infrastructure projects.
Stanlib, one of South Africa’s largest asset managers, has warned that the industry will face more challenges than opportunities in the next two to three years.
The asset management industry’s performance depends on the amount of savings available.
This is influenced by economic growth, employment levels, capital market returns, and whether money flows into or out of South Africa.
One of the largest savings pools is pensions, which have been experiencing outflows in recent years, with overall growth dependent on market returns.
The cost of running asset management firms is also increasing due to rising employment costs and the rand’s weakness against the dollar. This is putting pressure on profit margins.
A Deloitte report shows that the total AUM allocated to offshore solutions have grown from 6% in 2012 to 15% in 2022.
This indicates that clients are increasingly looking to diversify their assets globally.