by: RMI Investment Managers
Date: Dec 9, 2019
The year 2019 provided investors with some respite after what was an especially trying 2018. South African equities returned 10.5% over the year to end-October 2019, a stark contrast to the -8.5% seen in 2018’s calendar year which was one of the market’s worst performances in the last 10 years. Domestic bonds returned 8.1%, also performing even better than in 2018 when they gained 7.7%. The period was characterised by much uncertainty from both a local and international perspective. As a result, significant de-risking took place to the benefit of the fixed income market and some parts of the equity market, precious metals in particular.
The economic backdrop over the year was somewhat mixed. Investors had to contend with the ongoing trade war between the US and China and questionable global growth prospects, but central bank policy accommodation was supportive of risk sentiment. Closer to home, investors have been on tenterhooks about the potential downgrade of South Africa’s debt to junk status given issues with state-owned enterprises, Eskom and frequent power cuts in particular. Further evidence of governance issues and misconduct at various corporates weighed on risk appetite too. These factors all contributed to the risk-off sentiment seen in the South African market this year.
Risk-off environment favours resources and bonds
It is unsurprising therefore that in this environment, the resources sector posted strong performance as investors turned to gold in their search for perceived safe haven assets. The yellow metal has gained 18% year-to-date (US dollars, to end-October 2019) while the gold mining stocks index is up over 100%. The rebound of the resources sector accounts for 62% of the JSE’s overall return and means that the local bourse has done better than many of its emerging market counterparts. However, returns are still behind that of global equities (26.2%), whose gains can largely be attributed to the continued equity bull run in the US.
The domestic fixed income market also benefited from the risk-off environment. While performance came in slightly behind that of the equity market, it was ahead of global bonds thanks to the continued attraction of the country’s high yielding instruments as compared to much of the developed world where yields are low to negative.
Against this backdrop, we have seen boutique managers do well compared to their bank/insurer-linked peers. According to Morningstar data (performance ranking over three years to end October), 54% of listed equity portfolios managed by boutiques have generated first or second quartile performance compared to 50% in the case of bank/insurer- linked managers. For the most part, RMI IM’s affiliates have outperformed their peers too. Of the 23 CIS portfolios with a 3-year track record managed by RMI IM’s affiliates, 80% posted first or second quartile performance. Year-to-date and over 12 months, 61% have outperformed their ASISA category peers.
Figure 1. Independent boutiques have outperformed bank/insurer-linked counterparts
Bond portfolios a beneficiary of industry flows
Looking at industry assets, market moves and net inflows helped the industry post growth of 9.2% over the first three quarters of the year. Net inflows (including ASISA’s regional, global and worldwide categories) totalled R127.2 billion, compared to R79.8 billion over the same period last year. Fixed income managers saw large inflows; as an asset class, Fixed Income portfolios experienced the fastest growth over a 12-month and three-year period to end-September.
Figure 2. Industry asset growth
Figure 3. One, three and seven-year CAGRs for ASISA categories
That said, multi-asset remains the most popular destination for retail investors, holding 43% of total assets under management.
Figure 4. Assets under management by ASISA category
Challengers outperform CIA and Contenders again
Boutiques have received a healthy share of the industry inflows. The below chart illustrates this by plotting the quarterly flows attributed to each of the three categories we use to assess the asset management industry. The categories are: banks and insurers, the CIA firms (which includes the likes of Coronation, Investec and Allan Gray); the Contender firms (PSG, Prudential, Foord, Sygnia, Prescient and Abax) and then the Challenger group, which is made up of the smaller managers like the RMI IM affiliates.
While banks and insurers have attracted the lion’s share of net flows, the Challenger group holds second position, outperforming both the Contender and CIA firms by some margin. Compared to last year, the Challengers have also posted impressive growth: in 2018 quarterly net flows totalled approximately R18 billion over the first three quarters of the year, versus the R41 billion recorded over the same period this year.
Figure 5. Quarterly net flows by category (excl. money market)
Looking forward into the new decade, there are a number of “known unknowns” that lie ahead; issues we know about but the outcomes of which are highly uncertain. Will South African debt be downgraded to junk status? Is it possible the US and China reach a mutually beneficial trade agreement? Will the global economy tip into a recession? Who will win the US presidential election?
With so many unanswered questions, the outlook for 2020 is anything but certain. One thing is for sure though: there’ll be plenty of “unknown unknowns” to take us by surprise too. We have every faith that our affiliates will keep their heads about them as they navigate through the year and we have no doubt that they will remain committed to generating the best returns possible for their clients as well as growing and transforming the asset management industry.