A journey to the zenith of market regulation

The vibrancy of the inter-bank market made it lucrative to set up a bank and attract significant deposits which could easily be placed with other banks or corporates through bankers’ acceptances or commercial paper.

As it required significant capital to set up a bank, by contrast setting up an asset management company required much less capital and a much simpler process, a company registration.

With an asset management company, one could attract deposits and profit from the high interest margins in the inter-bank market.

It is not surprising therefore, that around the year 2000 there were over 50 companies operating as asset management companies in some form or other.

I worked for Kingdom Asset Management at the time. Being part of a broader financial services company, our priority was not on deposit taking.

Other units of the group did that. Rather we sought to grow our funds under management through unit trusts and pension fund mandates.

Such was our desire to reach the masses that through extensive campaigns including the “Making Money Make Sense” TV programme, Kingdom quickly became a household name synonymous with investing.

 

The age of consolidation and attrition

The landscape was severely shaken in 2003 when the Governor of the Reserve Bank of Zimbabwe Dr Gideon Gono, whose institution also regulated the asset managers, introduced sweeping measures to bring “sanity’’ to the fund management industry.

He referred to us as a “problem child’’ whose antics were reminiscent of the wild west.

His primary goal was to stop undercapitalised, unregulated firms passing off as legitimate deposit taking institutions.

With the measures asset management firms had to be licensed by the Central Bank and meet set capital requirements.

The move by the RBZ led to serious consolidation and attrition.

Getting a licence was not easy either since the RBZ had made it clear there were too many asset managers and were only going to license a set number.

In the end they licensed 15 and Kingdom Asset Management which I headed at the time was second to be licensed after Old Mutual.

Prior to the RBZ intervention, several of the leading asset managers had foreseen the coming of the Tsunami and were increasingly concerned about the proliferation of the fly by night firms and therefore mooted the establishment of an association to self-regulate the industry.

At the time there were numerous cases of mis selling and fraud giving all of us a bad rap.

The collapse of Access to Capital dealt the industry a severe blow. Not long after we had to deal with the aftermath of the collapse of ENG further reenforcing the RBZ Governor’s perception.

 

How AIMZ was established

In 2001, after several meetings attended by Southampton (Kenias Mafukidze), Imara (John Legat), Temple (Ian Christie), Old Mutual (Zomunoda Chizora) and Kingdom (me) the Association of Investment Managers of Zimbabwe was founded with Kenias as Chairman and I as vice.

I took over from Kenias in 2003 and held the Chairman position until 2009. The formation of AIMZ set the foundation of the industry as we know it today.

Through serious lobbying, the RBZ eventually endorsed the association’s role and not long after that all licensed asset management firms felt obliged to become members.

While the RBZ regulations brought some order, industry players resented being treated like banks. Little was done by the regulator to grow or develop the industry.

In the eyes of the RBZ, asset managers were still a menace, undercapitalised deposit takers to be treated as such.

With rising inflation in the early 2000s fund management portfolios began to shift from fixed income assets to equities placing less reliance of money market deposits.

To succeed firms began employing more analysts bringing the CFA qualification to prominence. The industry also began to rely more heavily on institutional investors, notably pension funds, for funds under management as most individual investors were not for the long term.

To win pension fund clients an asset manager had to have the right profile and be in good books with pension fund administrators the likes of Comarton, AON and Marsh.

None of this really mattered at first to asset managers that were part of insurance groups as they had captive inhouse insurance and pension funds to manage.

That changed as an increasing number of pension funds began moving from guaranteed schemes typically run by insurance companies to self-managed defined contributions schemes whose success depends on investment returns.

Competition began to heat up. With asset manager performance being essential to attract and retain pension fund clients, problems arose in agreeing on measuring investment returns.

Each pension fund administrator had their own survey based on the asset managers that managed funds they administered.

The AIMZ tried with limited success to set standards. I guess the debate was finally settled with the establishment of Intellego Investment Consultants in 2015 with its scientific approach to performance measurement and portfolio classification.

The SEC also weighed in by banning all pension fund administrators not licensed by the Commission to do so for them to conduct and publish performance surveys.

My move to head Zimnat Asset Management in 2006 somewhat took me away from the cutthroat competition for pension fund mandates.

With a captive in-house business and sizeable funds under management the focus was on value preservation as the country headed towards hyperinflation. In some way fund management became very simple – buy as many shares as you can at whatever price, as a hedge against the Z$ losing value by the day.

I left ZAM in 2010 and the following year joined SEC. The present day fund management industry Currently the fund management industry is in fine health with 19 firms managing over Z$400 billion and all of them profitable. It’s looking good.

I have some worries, which if not addressed could handicap the industry in the future. I also see some positives. I will start with my concerns.

The FUM have grown without a corresponding increase in the number of clients, I am referring here to pension funds, the industry’s bread, and butter.

The number of managed funds may have come down.

A notable addition is the PSC Pension Fund. What this means is that the remaining portfolios have grown with inflation, albeit ahead of inflation.

For sustained growth the industry needs more funds to manage from a wider pool of clientele.

Another concern is the that due to over dependence on pension funds for business, skills to manage other types of clients notably high net worth individuals are being lost.

I believe this client category is huge and warrants attention by professional asset managers.

As things stand if the rich continue to manage their own investments, they may not see the need to engage professionals to do the job for them in the future.

This feature is part of the wider human resource drain as the economy contracts causing skills flight. The lack of a vibrant money market is another blow to the industry for several reasons.

First, fund managers are losing skills to invest and create portfolios in this asset class.

The high inflation has rendered fixed income irrelevant for many years to the extent that many fund managers don’t bother understanding it to their detriment should we return to sustained single digit inflation.

With reduced activity in this key asset class portfolios are beginning to look the same, if not identical, heavily weighted in large caps equities. It’s virtually impossible to distinguish asset allocation and stock picking prowess.

With the emergence of EFTs, it may soon be difficult for fund managers to justify why a client, even large ones like pension funds, would need to create separate equity portfolios instead of investing in these funds.

Add to this the number of delistings we have had over the years with no IPOs, the challenge to diversify becomes even trickier. To diversify asset managers are forced to seek alternative assets, which is code for property.

This is an investment class that is not developed when it comes to centralised pricing and trading data. Without indices nor clear valuation methodologies debates with clients on its performance will continue.

The absence of a risk-free rate and yield curve means that there is no bond trading and derivatives. Without an active interbank money market, no securities can be traded on margin or leverage. The result is that while FUM may be growing we are not broadening or deepening our market.

My other concern is the shallowness in reporting by listed companies.

The Commission’s efforts to hold listed companies to a higher reporting standard yielded very little due to our limited regulatory powers over listed companies’, an issue I have discussed elsewhere. The result is little for analysts to go on.

Even more worrying is the fact that not many stockbrokers have research analysts limiting the number of third-party research recommendations.

This has serious ramifications downstream for the (retail) investor who relies on professionals for disclosure to inform investment decisions.

Developing and growing the FUM industry

On the bright side the industry has a regulator who understands and cares for its growth and development.

SEC has in the past demonstrated its willingness to work with the fund managers to resolve issues of concern.

These engagements led us to adopt capital and licensing requirements more suited to the industry. We encouraged petition and are promoting inclusion by lifting the ban on new players entering the field and number of operating firms continues to grow.

In time I expect to see more specialisation away from the current situation where all players have the same product offering.

It’s for this reason we crafted rules to allow for REITs and EFTs. I believe more products will follow. Our plans to further automate the securities markets infrastructure will further reduce Backoffice costs.

With few of the asset managers undertaking meaningful marketing to grow FUM and encourage investments in general, SEC has had to pick up the slack and is now the standard for investor education.

We appreciate that this is something we have had to do given that most players are small and lacking budgets to undertake such endeavours and that it’s our mandate to do so.

Nonetheless the industry would grow much faster if industry players publicly complemented our efforts.

To think several of these firms manage unit trusts which are purpose built for the public yet do not publicly showcase them.

The GrowWealth unit trust monthly publication is our way of forcing their hand to step up. We also understood that post hyperinflation confidence in investing in general was lost and needed serious rebuilding.

The reconstruction meant moving the inefficient, manual, and paper-driven infrastructure p to automated and electronic platforms.

Moving the regulation of the industry from the RBZ to SEC though an obvious step was not as straightforward.

We achieved it in 2012 and immediately opened ourselves up to dialogue which led to more acceptable capital and licensing requirements.

In the process we lowered their operational costs by mandating the use of third-party custodians. Backoffice costs fell further with the market automation and deployment of a CSD.

Overall, we improved investor confidence in an industry with a dodgy past. Our regulatory approach has kept the industry scandal free.

Firms that have folded on our watch have done so with neither loss to client nor contagion.

Future prospects and key to FUM growth going forward

As the economy continues to stabilise the industry will experience real growth.

Key for growth in my view will be specialisation, away from a standard and common product offering.

Re-emergence of a vibrant money market is also key for product diversity and portfolio hedging. It will also draw money market clients to the industry.

People forget that equites by their risky nature are not suitable for everyone.

I would also like to see a more structured property sector one where professional investors like fund managers can safely go in without having to do everything like changing land use, being property developers and valuers, etc.

Adding high net worth individuals to their client list would also help grow the industry and create avenues to market more specialised products.

We need to have more wealth managers. Lastly, I would like stockbrokers and financial advisory to be more active in bringing more deals to the market.

At present corporate advisory is very quiet limiting the number of alternative assets fund managers can invest in.
—Asset Managers Journal  

 

Tafadzwa Chinamo is the former CEO  of the Securities and Exchange Commission of Zimbabwe