An investor unshackled has wings to fly

The chips are down, and the game is in play – Investec Asset Management will be demerged from Investec Bank and listed on the London Stock Exchange, with an inward listing on the JSE, by March 2020, assuming shareholders approve the unbundling.

From there the mid-sized asset manager, which manages assets worth £121-billion, will fly or flounder.

For CEO Hendrik du Toit this is the culmination of a dream he has long nursed, to unshackle the asset manager from its bigger stablemate and be allowed to fly independent and free – a global firm with South African roots and a unique emerging market focus.

“The world around us is changing... this is not a time for conglomerates, it is a time for simplicity and focus. I believe more focused businesses do better than broad giants that try to grow laterally,” he says.

As a result of the demerger, Investec Asset Management (IAM) – to be renamed Ninety One in March – will see its shareholding change.

Investec, which holds 80% of IAM currently, will unbundle its shares to existing shareholders, retaining a 15% stake in the company. Investec plc shareholders will receive one Ninety One share for every two Investec shares they hold, while Investec Limited shareholders will receive one Ninety One Limited share for every two Investec ordinary shares they hold.

Management and staff will continue to hold 20% of the larger entity, with new public shareholders and current Investec shareholders holding 65%.

“Employee ownership is highly correlated with success,” says Du Toit. “What happens is that management decisions are made with a long-term, intergenerational view, way beyond the current management horizon. This is better for retaining and attracting talent.”

The firm will not change, beyond its name, and will remain true to its active management roots and ethos.

“Investing is an act of faith,” says Du Toit. “It’s an act of hope, of trying to shape a better future. That is what active investing is about.”

This investment ethos is close to his heart and he references the Financial Times’ Martin Wolf who regularly decries the type of capitalism taking hold in the world; it is one that is characterised by weakened competition, feeble productivity growth, high inequality and an increasingly degraded democracy.

Wolf suggests that the answer to this is “not to overthrow the market economy, undo globalisation or halt technological change. It is to do what has been done many times in the past: reform capitalism.”

Du Toit sees big managers as the “agents of change".

"We pool capital, apply capital, and return capital for people to live better. But we have to live up to the challenge of our times – sustainability must be at the core of everything we do.”

Since inception, IAM has experienced stellar growth in assets under management, with compound annual growth of 15% in the last decade and £44-billion of cumulative net flows since April 2009, representing about 50% of total AUM growth.

While loath to put a number to growth aspirations once the demerger takes place, it is clear Du Toit is confident that management will be able to scale the business, organically.

“The amount of money that will look for an active return is only going to grow. And good managers will be in demand.”

Adrian Cloete, portfolio manager at PSG, believes the benefits of the demerger outweigh the negatives.

“Independence is valued by clients, and the new structure preserves and promotes a high degree of employee ownership. This is an ideal structure to attract and retain talent, and the alignment of management and staff interests with those of shareholders is good in the longer term.”

On the downside, the firm will be responsible for its own marketing and branding, as well as the costs of maintaining a separate listing.

However, Du Toit cautions that the explosive, linear growth of the past cannot be guaranteed into the future.

“We are at the later stage of a long bull market, driven by lower interest rates and strong economic growth. But the world is changing. When the US threatens the French with tariffs, as we saw recently, it’s a different world, it’s a world that is leaderless – we need to be careful.”

He is not blind to the many headwinds facing asset managers like IAM, not the least of which is the move to passive investments in recent years. Index funds are poised to overtake active management in the US by 2021, according to estimates issued in March by Moody’s Investors Service.

In addition to this, the unrelenting pressure on fees, flows into private assets, and the gap between technology leaders and laggards have caused many to argue that to survive as an asset manager, one needs to be either a small alpha driven boutique, or a giant with over $1-trillion in assets.

Du Toit, predictably, does not subscribe to this.

“We don’t believe in the myth that mid-size businesses cannot succeed in this world. If you have a business with an operating margin of over 30% and infinite return on equity, you can survive. Just don’t compete head-on with Black Rock.”

IAM has grown beyond its SA and UK footprint into a business that is managing assets in the US, UK, Europe, Asia and Africa. It is more than just a South Africa-UK business, and this is what Du Toit is hoping will become more evident post the demerger.

Aside from its broad distribution, its emerging market investment focus is a key differentiator, he adds.

“EM exposure is the long-term motor for growth and if one is linked to a future dominant part of the world, as we are, then you are well-positioned for the future.

“We don’t foresee huge growth in earnings in the near term, but I think we can forge ahead to build a business for the long term.”

Let’s hope this is one that flies. BM