Hardly a week goes by without much editorial comment on our preparations for the 2010 World Cup. Will our stadiums be ready? Will the new, well-remunerated coach be the answer to Bafana Bafana’s woes?
On a slightly less exciting, but no less important, note, we try to predict what the South African unit-trust industry will look like by the time the world’s top players descend on our shores.
Over the past decade the unit-trust industry has grown exponentially both in absolute and relative terms. We expect the industry to continue to grow market share at the expense of the much-maligned life industry (as well as from segregated private and retirement accounts). The clear benefits of transparency, liquidity, strong consumer protection and taxation should see the industry grow from R450-billion to more than R1-trillion.
A strong driver of this growth will be the continued emphasis on consumerism. In a low inflation environment, investors will encounter lower nominal returns and will focus on reducing costs. Disclosure, already a relatively strong point of the unit trust industry, will improve further; for example the upcoming disclosure of total expense ratios.
Regulators and journalists will continue to highlight and discourage any areas that appear to present conflict of interest. Their role will become more active and effective, as witnessed in the recent bulking debacle and the current debate surrounding scrip lending and softing.
A by-product of the quest for value is that we expect more affordable, simpler retirement products to be made available. This has begun with unit-trust companies offering unit-trust-linked retirement funds (such as retirement annuities) directly. Previously this had been the domain of the linked investment service providers (Lisps). This blurring of the roles between Lisps and unit-trust management companies will continue and accelerate, and may well be aided by changes in legislation.
Changing demographics (particularly among high-net-worth individuals) is going to catch many industry players off guard. By 2010 nearly 40% of all potential high-net-worth clients will be black. This creates an enormous opportunity for those who position their businesses accordingly.
International research, particularly in the United States and Australia, has shown that most successful financial planners have changed their businesses radically from selling products to providing advice (and leaving the investment-management component to specialists).
We anticipate that this trend, which has begun in South Africa, will gather momentum and that those who embrace it will benefit from early mover advantage. The unit-trust industry has responded by offering more solution-type (asset allocation) funds.
Undoubtedly, the investment industry will become even more competitive. The long-term winners will be split into two main types of players. Firstly, those who offer specialist services (such as boutique asset management) and, secondly, those businesses that are able to provide services efficiently and cost effectively by creating scale (such as distribution and administration).
The asset-management environment, too, will change. Managers will be expected to play a more active role in companies in which they invest. Coupled to this will be a greater emphasis on socially responsible investing. On a more technical level it is probable that investors will attempt to split alpha (expensive) and beta (cheap) in an attempt to reduce total costs.
All of the above means that the client should have more choice, cheaper offerings and greater disclosure. Good news indeed, yet the prediction we feel most confident of is that investors will continue to make the same errors that they have made for centuries — errors based on being human, such as suffering from fear, greed, short-termism and over-confidence.
This means that the need for good advice will remain unchanged. The beneficiaries throughout the industry will be those players who consumers trust. Companies can earn trust by having a clear value proposition, and then consistently delivering on that promise.
In summary, by the time crowds begin the Mexican wave, much will have changed for the good in South Africa’s savings industry, yet most of the investment basics will be unaltered.
Nic Andrew is head of Nedgroup Investments