How managers can drive up the fortunes of equity funds

Pressure is rising for equity fund managers. Equity funds have seen their assets eroded following persistent weak markets.

Average assets under management (also takes into account mark-to-market losses) for equity funds slid to Sh5.6 billion in 2016, down from Sh6.8 billion in 2015.

Even large investment firms, from Britam to Old Mutual, were not spared either. Assets at Britam, for example, dropped to Sh3.6 billion from Sh4.4 billion in 2016.

Old Mutual had about Sh1.4 billion under management as of the end of the year, down from about Sh1.8 billion in 2015.

But while some jittery investors redeemed funds, others have been funnelling their cash into money market funds.

Total assets held in money market funds ballooned by 54 per cent to Sh31 billion in 2016, up from the previous year.

But what does it all mean for equity funds?

First and foremost, at some point, it’s likely that the current direction could become unsustainable, especially if clients continue to withdraw cash and/or these funds fail to attract enough assets.

It’s for this reason why I believe that equity fund managers need to rethink how they’re going to continue being profitable in the midst of the uncertainties.

Here are my three suggestions: One, in order to offset dwindling assets, these investment houses can and should consider merging. For a sub-sector that’s hardly cracked the Sh20 billion mark, having 14 equity funds is a little too many in my view. Moreover, standing alone means each shilling earned through management fees becomes less lucrative when assets shrink.

Two, automation. This is important especially in view of the high management fees. Until now, most equity funds on average charge between 2-3 per cent on assets under management (and almost all have a sales fee). So in a bid to woo investors through low-fee equity funds, investment firms can start allocating more of their budgets to technology.

Areas ready for disruption include sales, portfolio reporting and trade execution. What’s more, technology can also help replicate active management strategies at a much lower cost.

While this may lead to fewer traditional roles, investors can benefit from lower fees as these investment firms benefit from increasing assets. By the way, investors are likely to naturally gravitate toward a cheaper fund as opposed to a costly one. 

Three, strengthen performance. Great track records will attract the money. Equity managers who’ll continue to win business are those that will continue to perform.

But those that do badly will see their assets wither further, as withdrawals compound poor returns. In other words, performing funds will be beneficiaries of the current upheaval in the sub-sector.

In conclusion, though it’s true that equity funds are struggling in the current prolonged climate of dropping markets and flagging economy, these suggestions offer a long-term remedy. There is hope.