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After the well-publicised performance travails at Piet Viljoen’s RECM, its biggest public supporter Nedgroup Investments has been asked why the continued loyalty. I visited with the man who makes the ultimate decision to retain RECM, Nedgroup Investments chief Nic Andrew. Here’s Nic’s thoughts on the matter – and the spectacular overall results that have flowed from the its Best of Breed strategy. – AH
This SA Investing podcast is sponsored by Nedgroup Investments. I’m here in some spectacular offices with Nic Andrew who’s the head of Nedgroup Investments. You guys inherited these offices form the old BOE.
That’s right. Soon after that, things got a bit tougher, but we’ve managed to stay here and they absolutely, are fantastic offices. Unfortunately, we have a bit of a fire outside and some rain (but I guess the rain’s good), so the view’s not as good as normal.
It’s lovely to be here in Cape Town, as always. There’s lots happening in your industry, not least the whole story with RECM. I don’t know if you’re as close to the action as everybody seems to think you should be.
Yes, we are very close to that. It’s an important fund and relationship, which we have and it’s obviously, something that we are very closely monitoring and communicating with our clients.
What’s actually, going on there? I think Danie Malan has now departed.
Yes. They’ve had a period of quite significant underperformance. Much of that is based on some of their specific style, which we understand. Still, the results have been disappointing and as a business, they are addressing it and they are making a few changes. One of them has been that Danie Malan has left.
From your perspective, they have a particular style as you say, and if people wanted to ‘pays their money and takes their choices’ it’s part of the bouquet that you offer.
It’s very important when you select a manager that you understand the exact reason why you’re selecting them and we understand that. As I said, we do remain disappointed by some of the results and we are looking at it very closely, to make sure that whatever we do is in the best interests of our investors.
Generally speaking though, are South Africans still keen on unit trusts, or are ETFs (more passive investing) starting to take a bigger slice?
No, it’s very interesting. Offshore, one’s seen a big trend both in Mutual Funds and in ETFs. In South Africa, it’s actually been unit trust dominating and we’ve seen quite big outflows out of ETFs in the last quarter. However, on the same side, there’ve been big inflows into passive unit trusts. The unit trust vehicle is well suited for financial advisers. It’s well suited and well regulated to individual investors, and continues to grow market share from ETFs, segregated portfolios, and from life companies.
How are you advising those financial advisers to advise their clients? I say this because when stock markets run the way they have (the way the Johannesburg Stock Exchange has), there’s always a danger that you might overplay your hand.
It’s rather important that one manage expectations very carefully. I was just writing our annual report and I’ve become a bit of a ‘stuck record’ in telling advisers and investors to manage their expectations. The returns that we’ve experienced from the market have certainly been well above long-term averages and it’s vital that one doesn’t extrapolate that into the future. As South Africans, we’ve all had a very good run, but we shouldn’t anticipate that to continue going forward. Certainly, the road ahead is going to be much tougher and much bumpier.
If you get double-digit growth – enjoy it. Anything above that – perhaps a bonus.Absolutely. If you can give inflation + four or five, you’re doing very well from here, for the next few years.
Where’s the money flowing to?
It’s interesting. The flows have become very concentrated in terms of which platforms they’re on, which fund managers they’re going to, and even within, the fund managers are rather concentrated on which types of funds. For a while, we’ve seen a big increase and this has been since the introduction phase into multi-asset funds where the adviser is largely, giving the fund manager the responsibility for making the asset allocation decision, which I think makes a lot of sense. Generally, clients and their advisers have done well out of making that decision. We are seeing international growth as well. With some of the rand weakness last year and some of the negative news coming out of South Africa, South African advisers and investors are looking to diversify offshore, and we’ve seen quite a big pick-up in that trend.
Do you expect it to continue?
Both those trends are well established. I think that the multi-asset trend will continue for some time. The international trend is at an early stage and we’re certainly seeing increasing interest in the international side, in our business. In addition, we are seeing an increasing interest and views on our low-cost offerings.
So fees are now becoming a lot more important, too.
Absolutely. A combination of the lower interest rate environment of increased competition and regulation is that we are seeing a reduction in fees. There’s been a significant reduction in fees over the last five or ten yeasr and I expect that with the introduction of passive, the RDR and various regulations, that trend will continue.
That’s a big change for South Africa – the RDR. I was talking to – I think she’s the assistant director at the regulator – and she was explaining how we aren’t going to make the same mistakes that the Australians and the British made. Do you think that’s realistic? Do you think we’re going to put our foot into a hole somewhere, too?
I think RDR’s intentions are very good and I think it’s good that we can learn from Australia and the UK because they did make numerous mistakes. The regulators have sent some rather comprehensive draft proposals (55 proposals, I think).
That means it’s taken you a long time to work through them.
It has and it’s very ambitious. The risk is some of the unintended consequences – that you’re too ambitious, so that you don’t achieve almost anything, because it becomes snarled up in the system. Having said that, I think that there are one, two, or three key proposals that can make a big difference, and can really, positively influence the industry and I’m hoping that those come through quite cleanly.
Now all your clients would be financial advisers – the people who work directly with you. Are they concerned?
I think their concern is around some of the unintended consequences. We’ve engaged with many people from the UK and I think that most South African advisers and especially the top South African advisers who are most of our clients, are much better prepared than advisers were in the UK. In the UK, most clients didn’t even realise that they were actually paying for advice. I don’t think that’s the case in South Africa. I think fees are clearly disclosed. It’s improved significantly over the last five years, so I think we are in a better position than the UK advisers were in.
Has there been a shakeout already in this industry? I guess some people are saying they spend a lot of their time learning to be a financial adviser. Now, there are all these new regulations. Are they going to be able to survive?
There’s been a lot of talk that there would be shakeout and there was some shakeout in the UK. Some advisers (old advisers) were shaken out when they needed to do regulatory exams a few years ago. Overall, many advisers have been preparing for this and have very good annuity business models and those that have positioned themselves well, have strong business and I think they’re in a place where they can thrive in the future. I think that we will lose some smaller players. It’s more challenging to get into the industry, a challenge that the industry needs to address. For those established players, I think they have very comprehensive and solid business models.
Nic, just to close off, from your own business model of being ‘best of breed’ or going for ‘best of breed’, we’ve seen from RECM that it brings its own challenges. Are you convinced though, that you have a winning formula?
Yes. Absolutely. If we look at our business overall, we’ve been going since 2003. For 12 years, we’ve grown assets from R5bn to around R150bn and overall, that’s because of good performance for the last six years. In each of those years, we’ve been among the top three in the Plexus ratings, which measures our overall range and at all stages during those 12 years, we’ve had one or two funds that haven’t been performing. Obviously, our responsibility is to make sure that our overall range performs and while we’re disappointed about the single fund, we’re delighted about the overall performance of our range and think it’s a very compelling offering to clients.
Nic Andrew is the Head of Nedgroup Investments.
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