South Africa’s Discretionary Fund Managers (DFM) will play an increasingly vital role to financial advisers and wealth managers as they face a barrage of increasingly 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 advisers 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.

Whilst 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 Financial Sector Conduct Authority, 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, the CEO of The Collaborative Exchange, said:

“Whilst this research paints a mixed picture, ultimately it highlights the increasingly crucial role DFMs play for wealth managers and financial advisers. 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.

“Ultimately, the big winners will be those that consolidate their position and invest in technology to solidly underpin their offering, helping to increase the speed of information to clients to help make more informed investment decisions.”

Carolyn Erasmus, Country Head South Africa at Bravura, added:

“Across the board, the current backdrop of a world-wide 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% CAGR (Compound Growth Annual Rate) 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 2021 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 R2.5bn. The report can be accessed via this link (note subscription required)

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