The investment environment will continue to be markedly affected by both the talk and actions of the US Federal Reserve in the New Year (2014), said Johan van der Merwe, head of Sanlam Investments (SI).
His comments were made before the Fed had its last 2013 meeting yesterday with markets across the globe on tenterhooks with regards to the future of quantitative easing, the massive practice by the Fed to pump money into the markets via a set purchase of bonds. US Fed chairman Ben Bernanke emerged from yesterday’s saying the US economy has registered significant recovery and the QE programme would be phased out steadily during the course of 2014. It was reported that the Fed had already cut the pace of its monthly asset purchases from the $85 billion mark to $75 billion.
Tackling the question: What will 2014 hold for investment management? Van der Merwe said “The key to success for investment managers lies in pursuing opportunities to expand assets under management and diversify revenue streams. For us, the 2014 priority list includes Africa, passive investing and the South African retail market.”
Van der Merwe said it will be difficult for investment managers with an emerging market bias to sidestep the quantitative easing (QE) juggernaut. “We know that QE tapering is on the table and have already witnessed the ripple effect of its announcement on emerging markets. But we are limited with regard to the steps we can take to mitigate the inevitable fallout.”
“First and foremost it is vital for investment management companies to have an investment philosophy that they stick to,” said Van der Merwe. “This philosophy is their anchor during periods of market turmoil.” SI applies a value investment philosophy regardless of what stage of the market cycle they are in.
From an operational perspective, Van der Merwe singles out three trends that South African investment managers can leverage over the next few years. The first is that South Africa is behind the international curve where passive investments are concerned. “Passive investment will continue to take off locally, especially in a low income and return environment where the cost of managing funds becomes an issue”. This belief is borne out by SI’s decision to acquire 100% of exchange traded fund provider Satrix in May 2012 and to launch a range of new index funds in the latter part of 2013 and early 2014.
The second trend is the rise of the financial services consumer and the potential for investment managers to tap into a more savvy retail investor. SI sees a lot of upside in the retail segment as South Africa addresses its rather lacklustre savings culture.
Investment managers will have to tread carefully in the retail space in order to comply with South Africa’s stringent pro-consumer financial regulations. “While investment managers are not subject to the strict capital requirements that banks and insurers are, there is a massive obligation on us to ensure compliance with pro-consumer regulation such as the pending Treating Customers Fairly (TCF) regime,” said Van der Merwe. SI has fully embraced the TCF principles and has recently realigned its business to operate in three distinct units designed to offer the best possible solutions to clients – the divisions are Sanlam Investments Retail, Sanlam Investments Institutional and the Investment Core.
The third and perhaps most lucrative trend is that Africa is once again “top of mind” for international investors. The Sanlam Group has made moving into Africa part of its strategy and through Sanlam Emerging Markets has direct business exposure to 13 African countries (excluding South Africa).
“From an investment perspective we have also leveraged the African reawakening via a range of Pan African funds,” says Van der Merwe. The group’s Pan African Equity Fund and Pan African Property Fund have been well received, with a Pan African Credit Fund set for launch in the coming year.
“We have been investing in African credit over the last four years off our own balance sheet and have a very good track record,” he says. “This experience, coupled with our 13-country African footprint, makes for a powerful argument when approaching investors to support our Pan African funds.”