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Local institutional and retail investors and intermediaries are open to advice and partnerships, especially on responsible investment
June 2020, London—Cerulli Associates’ latest report, Asset Management in South Africa 2020: The Lie of the Land, shows that international asset managers can find opportunities in the South African retail and institutional markets. The report is Cerulli’s first in-depth coverage of South Africa, which faces a series of economic, societal, and political difficulties but has well regarded legal and financial systems, an expanding middle class, and a large pool of domestic investors.
South Africa’s insurance and retirement fund markets are the largest in Africa, with combined assets under management (AUM) of ZAR5.8 trillion (US$415 billion). The country’s larger domestic asset managers have the ability to offer most major mandates in-house; however, they cannot do everything themselves, so strategic partnerships play a key role in the local market.
Independent financial advisors are central to South Africa’s retail mutual fund market and account for 64.6% of total retail AUM in 2019, according to data from the Association for Savings and Investment South Africa. Multi-asset funds are extremely popular in South Africa, dominating the local market in 2019, with total sales of ZAR55.6 billion, markedly up on ZAR25.6 billion in 2018.
Environmental, social, and governance (ESG) investing is yet to fully take hold in South Africa, but it is starting to gain traction. Many believe that the coronavirus pandemic could accelerate this trend.
“Although ESG implementation has been slower in South Africa than in Europe, shareholder activism is increasingly forcing institutional investors to embrace the concept,” says John Sherrocks, a senior editor at Cerulli and lead author of the report. “At the moment, ‘G’ is the primary consideration when it comes to integrating ESG factors into the investment process, but ‘S’ and ‘E’ elements will gain prominence as awareness of the effects of climate change and social inequality increases.”
Regulation and risk management are currently the key drivers of the growth of responsible investment in South Africa. The Financial Sector Conduct Authority has issued guidance notes on disclosure and reporting requirements relating to sustainability. For example, funds holding assets that “limit” the application of ESG factors should detail how this benefits the fund. If a fund cannot provide a satisfactory reason for limiting its use of ESG factors, it should detail what it plans to do to rectify the situation or provide a reason why no action is to be taken.
“Although South Africa’s ESG laws are relatively progressive, some organizations in the country’s financial sector that have the power to impact change themselves are instead waiting to be prompted to shift their behavior by regulation,” adds Sherrocks.
However, investors in South Africa are becoming more aware of the influence they can have over how their assets are managed. This could lead to increased demand for responsible investment, including increased pressure on investee companies and the development of new ESG products. For example, in 2019, South African shareholders put forward significant climate risk-related resolutions at the annual general meetings of investee companies. Asset managers operating in South Africa should be interacting with companies to encourage positive corporate behavior, especially with regard to voting, engagement, and integration. They should also be making make full use of industry disclosure and reporting initiatives.
NOTES TO EDITORS:
The Cerulli Report—Asset Management in South Africa 2020: The Lie of the Land is Cerulli’s first in-depth coverage of the country, which is Africa’s second-largest economy and has well developed equity, insurance, and credit markets. The report examines the state of mutual fund and exchange-traded fund distribution across South Africa’s retail and institutional distribution channels.
Interviews and surveys:
Cerulli’s analysis centers on proprietary research, including more than 20 interviews with prominent asset managers and consultants in South Africa. In addition, 19 managers operating in South Africa completed a survey on key distribution methods; together these managers had AUM of US$217 billion as of December 2019.
The survey included questions about which factors are important to retail and institutional investors in South Africa, which mandates and sectors are likely to see growth, the rise of ESG investing in the country, and local investors’ attitudes to passive investment. The managers that completed the survey included some of the country's largest players, along with some mid-sized and smaller firms. Cerulli also surveyed foreign managers that have been operating in the country for some time.
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