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New products that local fund selectors would like to see

Citywire spoke to three local fund selectors about the kinds of funds they would like asset managers to launch.

A regular criticism of the South African asset management industry is that there are simply too many funds. Over decades, many firms have launched dozens of products that appear to have little utility other than trying to gather more assets.

Real innovation is far less common. There are few truly unique offerings in the market aimed at meeting a genuine, and specific demand.

But if forward-thinking asset managers were willing to engage with fund selectors about the kinds of products they were most interested in adding to their portfolios, what would those discussions look like?

Citywire asked three local fund selectors to describe what they would like to see, if they could work with an asset manager to develop a new fund. Their answers were fascinating, and enlightening.

Scroll through the slides to read their views.

 

 

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A regular criticism of the South African asset management industry is that there are simply too many funds. Over decades, many firms have launched dozens of products that appear to have little utility other than trying to gather more assets.

Real innovation is far less common. There are few truly unique offerings in the market aimed at meeting a genuine, and specific demand.

But if forward-thinking asset managers were willing to engage with fund selectors about the kinds of products they were most interested in adding to their portfolios, what would those discussions look like?

Citywire asked three local fund selectors to describe what they would like to see, if they could work with an asset manager to develop a new fund. Their answers were fascinating, and enlightening.

Scroll through the slides to read their views.

 

 

Robert Foster - MD at Star Investment Partners

 

Is investment Nirvana possible today?

In my more than 30 years of dealing directly with investors and their financial advisers, I have discovered that 90% or more of them want an investment that does everything.

It should give them the promised returns, which are higher than they can get in their own bank, and do this with:

  • Low volatility;
  • Consistent performance;
  • Liquidity;
  • Transparency;
  • At a reasonable cost.

In other words, they want investment nirvana.

To this end, during the 1980’s and 1990’s life assurers offered stable and guaranteed funds. Their weaknesses were that they offered very little transparency, unclear terms and conditions, and they were sold in very expensive life endowments. This meant that many investors never really experienced the good gross returns achieved or promised.

In the 2000’s and after the global financial crisis, some investors opted for hedge funds that attempted, and achieved, smoothing high returns using predominately long-short hedging strategies. At the time they were unregulated and difficult for retail investors to buy. Even now, despite regulation, cheaper pricing and daily pricing, in the main they have struggled to attract new investors and supporting advisers.

The big winners of IFA support and inflows over the past 10 to 15 years have been ‘balanced’ multi-asset unit trust funds aiming for high CPI+ returns. Unfortunately, investors have again found themselves struggling for their ‘nirvana’. 

Before product wrapper fees and adviser fees, average returns have been below cash over the past five years and well below CPI + 6% p.a. over 10 and 15 year periods. In addition, returns have been very volatile, with some of the biggest multi-asset funds having suffered negative monthly performances of -12% to -13%. This has inspired fear rather than confidence, most especially for living annuity investors.

Having researched and analysed the opportunities available, we have realised that there is a compelling and more successful way to deliver for investors.

We discovered that by doing things completely differently and using lower risk income strategies initially and riskier growth assets introduced over time, we could offer investors higher and more consistent multi-asset positive returns. With compounding, these deliver the returns investors and advisers want.

It may not be investment nirvana, but it is a whole lot closer.

Greg Flash - CIO at Cinnabar Investment Management

The attraction and opportunity in Section 12J funds

A product that we would like to see developed by asset managers and available on LISPs and platforms are Collective Investment Schemes (CIS) that have a focus on venture capital. Cinnabar is one of the only fund selectors operating in the retail long-only environment which has experience in this area.

We have been managing two Section 12J Venture Capital Funds over the past few years. We have seen both the interest from investors and the benefits to the investee companies and entrepreneurs running them.

The attraction of Section 12J funds was primarily the tax incentive offered to investors, which has arguably been the primary driver of the sector growing. Although essential, the primary reason for these funds is to drive economic growth and job creation in South Africa.

Even with the Covid-19 crisis, we have seen many of the underlying companies that our 12J funds have invested in, flourish. This has been due to the very nature of the companies being run by nimble entrepreneurs, many of whom solve real-world issues through technology. As such, the coronavirus world we live in has accelerated the adoption of their brand promise.

It is unclear if Treasury will continue the Section 12J legislation. However, no matter what they decide, we believe this investment sector should be made available in the more traditional CIS structure. This would allow investors to include them in their retirement portfolios, albeit at a small percentage.

The benefits of this would be the massive support to South African entrepreneurs. It is also likely that this would attract younger investors into the more traditional retail CIS space.

Ross McChlery - Senior fund analyst at PSG Wealth

The ideal balanced fund

An ever-present issue for the South African investor is the debate around investment allocations between local and offshore. We believe the development of a multi-asset balanced fund that is not constrained by the limitations of Regulation 28 could serve as an appropriate savings vehicle for investors who already have retirement products.

As it stands, Regulation 28 only allows a maximum limit of 30% exposure to offshore assets in retirement products. At PSG Wealth, we’ve been doing extensive research into the ASISA worldwide multi-asset flexible sector, which allows for local and offshore investment, with no asset class or geographic constraints.

We’ve found that the segment is dominated by funds that allocate almost exclusively between equities and cash, with a substantial skew to offshore. The sector tends to avoid bonds, property and South African assets in general.

An ideal balanced fund, in our view, would have all the characteristics of the ASISA multi-asset high equity sector, but without the Regulation 28 constraints. In its simplest form, the product would have 70% to 80% allocated to growth assets, with the remainder in fixed income and cash, and without any offshore allocation restrictions. It would also target rand-denominated inflation-plus returns over the long term.

We have engaged with our existing multi-asset managers about this idea and they were largely receptive to such a new product. Some are already independently working on similar solutions. 

Our philosophy incorporates the split-funding approach, where each part of the investment value chain can focus solely on their area of speciality. We believe such a product would shift the difficult decision of local versus offshore away from the investor and into the hands of the experts.

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Greg Flash
Greg Flash Average Total Return:
37.2%
6/11 in Mixed Assets - Flexible USD (Performance over 3 years)
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