Blue Chip Issue 86

BLUE CHIP On the money

BLUE CHIP On the money Making waves this quarter The future of the local DFM sector and a motivational read NEW REPORT SHINES LIGHT INTO THE FUTURE OF SOUTH AFRICA’S DFM SECTOR South Africa’s Discretionary Fund Managers (DFMs) will play a vital role to financial advisors and wealth managers as they face a barrage of complex investment decisions, a new report reveals. The report, created by The Collaborative Exchange and sponsored by financial technology provider Bravura, pinpoints the growing prominence of global passive investments and ESG filters in portfolio construction, combined with the rise of alternative strategies as a driving force of change across the market. This leaves a large proportion of financial advisors and wealth managers now sub-delegating their selection of investment managers and asset allocation to DFMs, particularly to those who underpin their offering with technology to aid investment decisions. While this is good news for DFMs, the report identifies various longer-term challenges for the sector that has mushroomed over the past two years. These include potential regulation from industry bodies including the Association of Savings of South Africa, which could place DFMs under further scrutiny, and may include more onerous barriers to entry and the standardisation of investment performance analysis. However, larger DFMs with access to scale, market-proven technology and extensive research capabilities will be able to weather these challenges and are set to increasingly dominate, according to the research. The report also predicts there may be several corporate actions and mergers in the pipeline, such as Glacier’s recent acquisition of Absa, to help with further market consolidation. Kevin Hinton, CEO of The Collaborative Exchange, said: “While this research paints a mixed picture, ultimately it highlights the crucial role DFMs play for wealth managers and financial advisors. DFMs have shown good growth in assets under management or administration since 2019, although we expect a combination of regulation and market saturation to put a dampener on this in the future.” Carolyn Erasmus, Country Head South Africa at Bravura, added: “Across the board, the current backdrop of a worldwide downturn and inflation is causing huge pressure in the sector. With regulation expected to arrive shortly, we’re seeing elements of this report mirrored in real life conversations, as DFMs look to cement their position in the market with industry-leading technology that helps make sense of complexity and create value right through the industry chain.” According to The Collaborative Exchange’s data, the larger DFMs have been growing their ZAR assets by more than 15% Compound Growth Annual Rate (CGAR) over the past three years ended 31 December 2021. There are, however, several outliers that have underperformed while exposing investors to higher volatility. Moreover, there has been a plethora of new entrants, since The Collaborative Exchange’s last report in 2019. The research was conducted as part of The Collaborative Exchange’s South African Discretionary Fund Manager Survey which aims to create a single reference and guide capturing the breadth of information regarding DFM service models in South Africa. In total, 26 DFM businesses were surveyed, including 11 larger DFMs with AUM greater than R2.5- billion were surveyed in 2021. The report can be accessed via this link (note subscription required) https://www.thecollaborative.co.za/dfmsurvey. WE PROVIDE PEACE OF MIND MitonOptimal provides advisers with peace of mind by offering established investment expertise, dedicated support and long-term partnership in managing their clients’ investment affairs. George Dell | Executive Director, Discretionary Fund Management | E: george@mitonoptimal.com | T: 021 689 3579 | www.mitonoptimal.co.za Issued by MitonOptimal Southern Africa Group (MitonOptimal). MitonOptimal South Africa (Pty) Ltd, registration no. 2005/032750/07, an authorised Financial Services Provider (“FSP”) with license no. 28160. MitonOptimal South Africa (Pty) Ltd complies with all the requirements of the Financial Advisory and Intermediary Services (FAIS) Act (Act 37 of 2002).

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