Earlier this year market information service TimBukOne noted that the number of listed companies on the JSE has fallen 40% since its peak. In 2001, there were 601 stocks listed on the local exchange. That has fallen to 344.
Source: TimBukOne (click to enlarge)
Thys du Toit, one of the founders of Coronation Fund Managers and currently chairman of Rootstock Asset Management, believes that this has profound implications for asset managers.
‘The asset management industry is only as strong as the investment universe,’ he said during an event this week hosted by The Collaborative Exchange. ‘And the South African investment universe, particularly from and equity point of view, has shrunk tremendously.’
He made the point that, excluding Naspers, the total market capitalisation of the remaining stocks on the JSE is less than $1tn. That is smaller than any of the three largest companies in the US – Microsoft, Amazon or Alphabet.
‘We now have so few investment opportunities that the fund manager that is only going to look at domestic equities, I believe, is dead,’ said Du Toit. ‘Unless you build capacity to be able to manage money internationally, you are going to have a difficult job.’
This is, however, hardly a simple proposition, for two reasons. The first is that a growing number of international asset managers, with global experience and reach, are establishing a presence in South Africa. The second is the rise of passive investing.
‘You need to compete with these international names,’ said Du Toit. ‘And to beat them you have to do something unique. A guy like Dawid Krige with his China fund is the route to go for a smaller business. He has found himself a niche where he is the expert.’
Krige is the founder of Cederberg Capital, which specialises in Greater Chinese equities.
‘Indexation is another big issue,’ said Du Toit. ‘I think there is a big place for that. And if you want to charge the fees that all of us are charging, then you need to be able to add value. If you can’t add value, you are dead.’
Du Toit believes that the reduction in the number of listed companies in South Africa has a lot to do with increased regulation.
‘We don’t have new listings any more because the red tape that you are caught up in when you sit on the board of listed company is enormous,’ said Du Toit. ‘So people don’t want to be listed any more because instead of being involved in strategic planning you are caught up in red tape.’
Du Toit is currently a non-executive director at Old Mutual, and has served on the boards of Coronation, PSG Group, Attacq, Pioneer Food Group and ZCI.
This burden of compliance is also a substantial challenge to the asset management industry. Guy Toms, the co-founder of Prescient Investment Management, noted that when they launched the business in 1998 all they required was a one-page certificate from the South African Reserve Bank.
‘That was it. There was no such thing as a compliance officer,’ Toms said. ‘But what we have seen in the last 20 years is a huge increase in regulation and compliance. We now employ four compliance officers and two lawyers. The amount of regulation and compliance is daunting, and I can see that that trend will continue.’
He expects that regulation of asset managers will increasingly align with that of banks.
‘The banks are exceptionally well regulated and I think there will be a big push to regulate asset managers as well,’ said Toms. ‘If you look at some of these big international funds, they have excessive leverage and don’t have to hold capital against that, whereas banks do.
‘I think it will become a much more rigid environment to work in,’ he added. ‘We won’t have the flexibility that we have been used to.’