Trying times: 2018 industry review

by: Zama Molai and Joanne Marshall

Date: Dec 6, 2018

2018 is likely to go down in the history books as yet another tough year for investors, especially in South Africa. The year got off to a shaky start with the late 2017 Steinhoff scandal still fresh in investors’ minds, only to be followed by the collapse of the listed property sector.  The listed property asset class has consistently been one of the market’s top performers in the past, but this year it has seen a dramatic reversal with the sector down -23.48% over the year-to-date to end-October.


Worst year for returns in a decade?


While other factors have also played a role, including those of a global nature, listed property’s losses have had a significant impact on the rest of the South African stock market, which is on track to record its worst calendar year performance since 2008. In fact, the JSE All Share Index (ALSI) is now underperforming cash over a five-year period.  As a result, the average investor has become poorer over this time horizon, with those in the post-retirement bracket arguably been hit the hardest. Perhaps one of the biggest disappointments this year has been that markets have remained mired in such a long-lasting low return situation.


The danger with such an environment is that it amplifies loss aversion, a behavioural bias where the pain of a loss is far greater than the satisfaction of a gain.  When this happens, there is the risk that investors jump ship from the equity market into cash, crystallising their losses in a low-return market because the fear of losing R1 is more powerful than the potential to make R10.


The bright spots


It is, however, not all doom and gloom.  There are ways and means by which investors could still generate good returns for the year.  For example, the resources sector of the JSE ALSI has put in a stellar performance; returning 16.23% year-to-date to end-October.  For investors that have been overweight in this part of the market, these positions should help boost their returns over the year. Investors that have managed to avoid the pitfalls presented by various “stock bombs” such as Resilient, MTN, Aspen and Woolworths (all of which have seen shares plummet this year) should also perform relatively well.


We are already seeing some of our affiliate managers post impressive performance compared to their peers in spite of the unfavourable market backdrop.  Our 12 affiliate managers span a wide range of investment styles and asset classes with combined assets under management of R104 billion as at 30 September 2018.  In general, our affiliate managers, across the main categories (equities, fixed income, listed property, offshore and balanced funds), have posted top quartile short-term performance which is quite remarkable given the state of the market.


Industry growth despite poor market returns


Looking at industry flows, 2018 has followed a similar pattern to that seen in previous years; the year started off slowly with only R0.8 billion worth of net retail flows in the first quarter, the lowest first quarter net flow figure since 2012.  But then, as in prior years, things picked up as the year progressed. The third quarter is traditionally the one that records the highest quarterly flows of the year and 2018 was no exception with R54 billion in net inflows into collective investment schemes which included money market funds.  This takes the net inflows for the first three quarters of the year to R80 billion, an indication that while the markets may not have posted much growth this year, the industry as a whole certainly has.


Figure 1. Industry asset growth, Source: ASISA, as at 30 September 2018


The breakdown of the assets classes that are attracting these flows is also broadly in line with what was seen in previous years.  Multi-asset funds remain the most popular destination for retail flows; 44% of the industry’s assets are invested in multi-asset portfolios, 17% in equity funds, 12% in offshore, 24% in money market and interest-bearing funds and 3% in real estate.


Boutiques have been beneficiaries


Boutique investment managers have been the primary beneficiaries of these inflows this year. Although flows have been fairly volatile, an upward trend can be seen in the overall flows to smaller managers over the course of this year, while the larger managers have seen somewhat of a decline in their quarterly flow figures.


The below chart provides a clear illustration of the quarterly flows attributed to each of the three tiers by which we categorise the asset management industry.  The categories are: the CIA firms (which includes Coronation, Investec and Allan Gray); the contender firms (PSG, Prudential, Foord, Syngia, Prescient, Abax etc.) and then the challenger firms, which is made up of the smaller managers like our affiliates.


Figure 2. Quarterly net flows by category (excluding money market), Source: ASISA, as at 30 September 2018


No knowing what lies ahead


As the year draws to a close, we expect to see flows to taper off in the last quarter.  Although, of course, there is no guarantee that 2019 will follow the same pattern.  We also cannot predict how markets will behave in these final weeks of the year or which managers will come out on top in what has been a difficult investment environment.  But, what we do know for sure, is that our affiliates remain committed to generating the best returns possible for their clients, no matter what the future holds.



About the Author


Zama Molai

Portfolio Executive, RMI Investment Managers


Zama joined RMI Investment Managers in April 2016 as a Portfolio Executive focusing on asset raising strategies. Her career in the asset management industry started at Coronation Fund Managers where she was an investment specialist for close to ten years. Thereafter, she pursued a new challenge at Rand Merchant Bank as part of the Debt Capital Markets distribution team.