Johannesburg - Last year was a tough one for investment management firm Stanlib, but the company is spending a lot of time investing in strategies to better manage risk in its portfolios.
This is according to CEO George Brits, who told Fin24.com: "2008 was a learning curve for us and we've spent a lot of time scrutinising what went wrong and we're asking a lot of hard questions."
Brits was responding to a critical article on Fin24.com which noted that Stanlib-managed funds comprise five of the ten worst-performing unit trusts on a year-on-year basis.
Brits said Stanlib parent Liberty Group has - under the guidance of its CEO Bruce Hemphill - re-evaluated its portfolio and balance-sheet risk across the group and in conjunction with a number of international finance experts will be implementing strategies to prevent a repeat of problems in 2008.
Investment analysts in South Africa have been highly supportive of the steps taken by Hemphill in the last two years and have tipped Liberty to be a strong performer in coming years.
This focus on risk-management by the group is something Brits believes will ultimately benefit Stanlib clients going forward.
In terms of the strategic direction that the Stanlib equity portfolios took in 2008, Brits compared the options his team faced to an athlete competing in the Dusi marathon. "On the second day, you're faced with two choices - either take the safer option across land to rejoin the river or the riskier but quicker route through the rapids."
Stanlib took the riskier option and in 2008, this didn't pay off and portfolios fell sharply.
In previous years, Stanlib's decision making had paid off and in 2007 they were recipient of a number of fund management awards.
"When you get it wrong, there is a lot of focus on decision making and one year numbers from both the media and your own team," said Brits.
Bigger is better
Brits, who is a qualified physicist, admits he was surprised by some of the practices in the asset management industry when he first entered it, but believes that big strides have been taken to improve transparency and reduce costs over the last few years.
He also believes that the regulation of independent financial advisors (IFAs) has improved in South Africa.
"Fifteen years ago, this industry was excessively profitable, but costs have come down," said Brits who pointed out that as an example, stockbroking commissions had dropped nearly 60% over that period.
In 2008, Stanlib turned over R1bn and realised a profit of just over R500m with around R400bn in assets under management.
Despite this reassurance, retail investors are focusing hard on costs and will be particularly critical of paying for negative performances.
One of the key criticisms levelled at large scale asset managers such as Stanlib is that in the last few years, they have focused more on size (assets under management) - and the associated fees - as opposed to service and a close relationship with clients.
While the common perception is that a smaller asset manager should be able to offer a more personalised service, Brits believes that "bigger is better" for the industry going forward from a variety of perspectives including risk and cost management. With increased legal, system and regulatory pressure coming to bear on asset managers, costs are likely to become more pronounced on the smaller portfolios.
"Regulation is going to sharpen up," said Brits but he reassured clients saying: "Stanlib would continue to absorb these costs."
A smaller portfolio with fewer clients while more nimble in the market, would have to spread these costs across a smaller client base making it harder for them to absorb costs.
Skill vs luck
On the subject of performance based incentives for asset managers, Brits has mixed views.
Currently Stanlib charges clients a flat management fee on their portfolios, some readers of Fin24.com argued that they should move to a performance based model in light of their performance in 2008.
Brits said: "One of the hardest things is to distinguish between luck and skill when it comes to asset manager performance."
Other asset managers in South Africa have previously commented that stand-out asset manager performance is often very difficult to assess in a bull market due to large gains being reported across the board.
In a small market like South Africa it becomes even harder as many managers hold a very similar mix of blue chip shares meaning that the only thing that differentiates there performance is typically weighting in these shares or even a "lucky" guess on particular share.
He pointed to the UK market where he had noticed two trends that might be important for the South African asset management industry to take note of.
"Life [insurance] companies in the UK have come in for a lot of criticism for their risk management in the last few years and they've spent a lot of time sharpening up their investment strategies and I wouldn't be surprised to see these businesses being standouts in a few years' time."
Brits said statistics from the UK asset management industry showed that the average asset manager remained in charge of a portfolio for around 18 months before they moved on to another position. He said: "This makes it very difficult for an asset management house to take a longer term view on a specific manager."
While 2008 was a bad year for Stanlib, Brits gave the impression he was taking the criticism on the chin but in his words "refused to be paralysed by fear".
- Fin24.com