CNBC Africa’s Fifi Peters spoke to James Rainbow, Head of UK, Schroders on the role of discretionary fund management in modern investment strategies, and the risks that active fund and passive fund managers have had to contend with in the third quarter.
My colleague Fifi Peters spoke to James Rainbow, who is Head of UK, Schroders, on the role of discretionary fund management in modern investment strategies, and the risks that active fund and passive fund managers have had to contend with in the third quarter. Let's listen in for more. I think what's really interesting is you need to separate the amounts of noise with GA politics from what we're seeing from feedback from clients and advisors and discretionary managers, and I think when we last done a sentiment survey, actually we saw sentiment pick up quite a lot through the first half of this year, which I think maybe a bit of a surprise, but I think people are generally feeling better about the backdrop and the business environment they're in, notwithstanding the fact that we have obviously a great number of elections all over the world, with the key US elections still to come later this year. Sure, because I mean if we look at stock market performance, it has been quite choppy, and I imagine that active managers have been on their toes quite a bit, just trying to navigate the events in the best interest of protecting returns. Maybe if you can just give us a read-through of the performance of discretionary funds over at Schroder, and how they have stacked up against the major benchmarks. You need to ensure that you are meeting clients' objectives first and foremost, which typically have multiple components. I think performance has been strong, returns have been generally satisfactory for clients, but I think that it's most important you look through a client lens based on their individual preferences, tolerances for risk, and so on. All right, so you spoke about the fact that sentiment has lifted somewhat in the first half, and there's a greater enthusiasm amongst the clients that you engage with about the state of the world right now essentially, so maybe just talk to us about the broader trends that you are seeing. I think within the world of discretionary management, the thing that you've got to focus on is the fact that clients are looking for a professional solution to the management of their money. This is a long-term thing in nature, you typically need to look through the short-term noise of markets and obviously geopolitics, which we just touched on, and I think that the partnership with a discretionary fund manager, whether there's an advisor there or not, is key in reassuring clients in that short-term, with that sort of short-term noise in place, and being able to look through. Speaking to those trends, how do they compare to what's happening over in the UK where you're sitting and what you are seeing from perhaps some of the clients that you are engaging with here in South Africa, or perhaps the industry here in South Africa. I think the trends are broadly the same, or certainly very similar, but perhaps they may be further advanced in the UK. So we've obviously had a programme of regulatory change that has gone back 15 years, which has driven advisors to focus on advice and largely to delegate responsibility for investment selection, which we know is discretionary fund management, to professionals. That's a trend that's very much in place in the UK, it has been for some time, and it's clearly evident that the same thing is happening in South Africa. There is clear direction with assets moving towards CFMs. Sure. I know we have touched on a bit of trends, but perhaps if we go deeper into the trend around growth, and if you can just maybe give us an understanding of what you are seeing there, specifically in South Africa's market. As you say, not as big as what is in the UK right now, but what kind of growth trends have you seen, and what kind of growth prospects do you see for discretionary fund managers here in SAE? Discretionary managers are representing already more than 20% of retail assets, so we are seeing a market that is already significant in size, but it is growing quickly. I think that the more that they demonstrate the partnership with the advisors that they're largely working with, and the advisors' clients, then generally what you're going to find is that as those relationships flourish, then assets will inevitably continue to flow in that direction. It stops the advisors focusing on things other than what they're really good at, and they're really good at giving advice, they're really good at building trust and reassurance amongst their clients, and they can bring in professional relationships for investment management, for investment selection, through partnering with the DFM. So that trend of growth, I would expect to remain in place for really some time yet. I don't think you've seen certainly anywhere near the upper end in terms of the market share that you may expect to see. So can we talk about the funds themselves? I mean I know by the very nature of the industry there's a lot of discretion in terms of what you can and cannot say, but are you able to disclose any detail in terms of which sectors have been offering the most growth prospects right now, or which asset classes have been perhaps giving the most promise in terms of return? I think again the important thing is that rather than look in terms of short-term allocation in individual asset classes, I suspect everybody at the moment clearly is talking about the Magnificent Seven in the United States, but I think that the role of the discretionary manager working with the advisor is to build a robust portfolio over the long term with an approach to asset allocation that meets the risk needs and appetite of any particular client. So I think it's more about building out those longer-term robust portfolios than necessarily looking to trade into particular areas of interest that are hot, notwithstanding what I've said about the Magnificent Seven, the growth of artificial intelligence, and all of those things that we all love to talk about. Sure, in terms of an asset split point of view, in terms of how much of one's portfolio ideally should be sliced for such funds, I mean I know you'll tell me it depends on the investor, it depends on where they are in the investment journey and what their objectives are, but is there a sort of ideal allocation that you would advise just in general terms for those who are looking to double here? If you think that the nature of the relationship is principally between the advisor and the discretionary manager, that rather depends. So we certainly see some advisors who want to work with one discretionary manager that they allocate all of their portfolio, all of their client portfolios to, and they develop a very deep relationship over time, and there are some advisors we see who use multiple DFMs for multiple clients, depending on what their individual needs and preferences are. I don't think one of those is necessarily the right or the wrong answer, but there's no reason why a client's portfolio can't be solely managed by a discretionary manager, provided the advisor is comfortable and confident in the expertise and the performance track record and so on of the DFM that they're working with.
Theme: The Growth and Trends of Discretionary Fund Management in South Africa
In a recent interview on CNBC Africa, James Rainbow, Head of UK at Schroders, discussed the role of discretionary fund management in modern investment strategies, shedding light on the performance and future prospects of such funds in the South African market. Amidst the backdrop of global geopolitical noise and uncertainty, Rainbow highlighted a positive shift in sentiment among clients and advisors, with a growing enthusiasm for the business environment. He emphasized the importance of meeting clients' objectives through a client-focused lens, considering individual preferences and risk tolerances. This approach has proven successful for Schroders, with strong performance and satisfactory returns for clients. Rainbow also touched upon the broader trends in discretionary management, emphasizing the need for a professional solution to money management and the long-term nature of investments. He noted a similar trend in South Africa, mirroring the regulatory changes and asset movement towards discretionary fund managers seen in the UK. With discretionary managers already representing more than 20% of retail assets in South Africa, Rainbow expects continued growth as these professionals demonstrate their value through partnerships with advisors and clients. The trend of growth is likely to persist, with assets flowing towards CFMs. Looking ahead, Rainbow emphasized the importance of building robust portfolios over the long term, focusing on asset allocation that aligns with clients' risk needs and appetites, rather than chasing short-term hot sectors or asset classes. He stressed the role of discretion managers in working closely with advisors to develop deep relationships and tailor portfolios to individual client needs. While there is no one-size-fits-all allocation strategy for clients, Rainbow highlighted the flexibility of working with a single discretionary manager or multiple DFMs based on advisors' preferences and clients' objectives. Overall, the future looks promising for discretionary fund management in South Africa, with continued growth expected as these professionals prove their value in navigating the complexities of the investment landscape.
"Discretionary managers are representing already more than 20% of retail assets, so we are seeing a market that is already significant in size, but it is growing quickly."
['Schroders', 'discretionary fund management', 'South Africa', 'investment strategies', 'asset allocation', 'financial markets']