For some time, fees have been a key area of debate in asset management. Industry dynamics have been driving down fees as firms find that they are less and less in charge of the value chain.
A recent study by Cerulli Associates into the South African industry found that a majority of asset managers view fee pressure as a ‘significant’ or ‘moderate’ concern. Speaking during an online CEO Forum organised by the Collaborative Exchange, the heads of two South African firms reiterated how meaningful this issue is, particularly in an environment of lower returns.
The head of Nedgroup Investments, Nic Andrew, pointed out that if a client’s total fee is 2%, including platform costs, advice and asset management, and the total return they are receiving is 10%, that is a ratio of 20%. However, when the total return is only 5%, that 2% fee is now 40% ‘and that is too big a proportion’.
‘There certainly will be pressure’ Andrew added. ‘It has already been driven to a certain extent by increased disclosure – the way that people are looking at all transaction costs is good for the industry. And the increased use of passive as a viable option also brings down costs.
‘Undoubtedly, if one puts this all together, the economic profit that sits within asset mangers is a less attractive proposition from an asset manager’s perspective going forward, but a more attractive proposition for clients, which I think is good.’
Cheree Dyers, CEO of Prescient Investment Management, shared similar sentiment.
‘I do think that if you are an active manager hugging the index there will be a challenge for you in the fees that you charge,’ said Dyers. ‘Across the value chain, everyone is going to be pushing down on fees, but we have to ensure that we remain sustainable and that there is fairness and transparency in what we offer clients.’
In addition to fee pressure, Andrew (pictured) added that it is clear that discretionary fund managers (DFMs) have also played a significant role in shaping the industry in recent years.
‘If you get the big tick from a DFM you can see significant inflows, but if you don’t it can be quite binary,’ said Andrew. ‘That can lead to concentration in certain funds. So it is interesting how they end up driving shifts in the industry because of those flows.’
A few years ago, Andrew noted, DFMs were selecting asset allocation funds. Now, however, they are looking far more for building blocks and doing the asset allocation themselves.
‘That drives how asset managers position themselves,’ he said.
Significantly, however, the economic realities of the industry will be as true for DFMs as they are for asset managers.
‘At the end of the day you want transparency for your clients, good administration, good disclosure and decent fees,’ said Dyers. ‘The DFMs that are really good at what they do will survive, and the bad will get taken out, ultimately.’
Will the big get bigger?
A particularly interesting dynamic in the local asset management industry is that smaller managers have been taking market share from the biggest firms in recent years. This is quite different to developed markets like the US and UK where there has been a growing trend of consolidation as the biggest asset managers are increasingly dominant.
It is unclear whether South Africa is simply behind this trend, or if there is an entirely different dynamic to the local industry. Andrew noted that ten years ago he was expecting the dominance of the largest players to slip somewhat, but it hasn’t changed as much as he thought it would.
‘I think a number of the large players have done a relatively good job for their clients and so have continued to be successful,’ he said.
However, there may be signs of this changing.
‘With the pressure on fees, as well as the fact that a number of big players haven’t performed that well over this period and are actually experiencing quite a bit of outflows, I think it will be interesting to see how things change,’ he said. ‘In 10 years’ time I think the landscape will look quite different.’
For Dyers (pictured), a key consideration is that the market itself is currently shrinking as the private pension pool is under pressure. That has implications at both ends of the size spectrum.
‘The savings pool is not growing, so it becomes a market share game,’ she said. ‘How lucrative that is and how you value-compete really goes to your fees and the returns you deliver.
‘From a large manager perspective you have scale and access to resources, and can structure your business efficiently. But a smaller house is more nimble, and maybe has a wider opportunity set available to them. That makes it interesting from a multi-manager and consultant perspective. There is room for both.
‘But it will be interesting to see in this next economic period how the smaller firms will survive and if there will be corporate action,’ she added.