Article for City Wire – September 2022

What we want from an asset manager

The group MD of Financial Fitness, Jim Millar, is clear on what he wants from an asset manager.
‘Our selection process is one of looking for managers that are consistently outperforming the average and are small enough to be nimble in this market,’ he told Citywire South Africa in an interview. ‘The JSE is a small market and can be illiquid as you get lower down the chain.
‘So we look for fund managers that might be described as boutiques, but are well-enough established to have a track record. In our funds of funds, we often have names that are not the household names, but they are fund managers that have demonstrated that they are very good in their particular field.’
Financial Fitness is also prepared to support these managers relatively early in their lives, when their funds are still small. However, Millar feels less comfortable with these positions when those managers start to grow too big. ‘We were probably one of the earliest adopters of the Coronation Top 20 way back when they started, and we stayed with them a long time. But then they became quite big, and we switched out. ‘We have a pretty large position in Fairtree Prescient Equity now, which has been the best local equity fund over the last five years. But their size is getting to be a concern for me.’
Financial Fitness is primarily a financial planning business, started by Millar in 1996. Its focus has always been on helping clients to reduce and manage debt, before providing them with the investment solutions to then start saving effectively. Initially, this was through model portfolios, which back in the early 2000s were risk-profiled as ‘jogger’, ‘runner’ and ‘sprinter’.
‘We ran those models on most of the major Lisp platforms for approximately eight years,’ Millar said. ‘We had great client adoption, and our clients enjoyed the names because it made sense to them in their own minds. ‘But we later made the decision to change the models into funds of funds, because we were having a lot of pushback on capital gains issues when we made changes. Due to competition, the industry had also dramatically reduced the costs of running a fund of funds.’
The Financial Fitness CIS range was launched in 2016 on the IP Manco licence, however the regulator required standardised language and so they couldn’t keep the same names. ‘Jogger’, ‘runner’ and ‘sprinter’ became the Financial Fitness Stable IP fund of funds, the Financial Fitness Balanced IP fund of funds, and the Financial Fitness Flexible IP fund of funds.
Initially these portfolios were only available to Financial Fitness clients, but the firm now also offers them as solutions to other financial advisers. Together with the more recently launched Financial Fitness Diversified Income IP fund of funds, these portfolios have just under R2bn in AUM. Financial Fitness Services also has about another R1bn in offshore and model portfolios.
Looking ahead, however, Millar believes that the new opportunities for DFMs and multi-managers will not so much be in these kinds of traditional offerings. ‘I think we are reaching the ceiling on what we could consider all the options in South Africa,’ he said. ‘Depending on where the line is drawn, there are approximately 30 DFMs in the country. Everyone is working off a small menu and trying to differentiate. I think we’ve reached our saturation.
‘But I think there is a lot of work that can be done offering global solutions from South Africa. That is particularly important for those South Africans who now either live overseas or who have family living overseas, because we know that every South African wants to return home someday. And if their global investments are being managed by a South African entity, we have experienced that they feel quite comfortable with that.’
The second opportunity Millar sees is in offering solutions that are explicitly far more flexible in their asset allocation than traditional risk-profiled models. ‘When there are super profits, there’s opportunity,’ he said. ‘And I think there are some super profits being taken in the hedge fund industry, not necessarily for delivering super returns. ‘In my mind, hedge fund managers are effectively doing market timing. And I think in the long only industry we can run a managed portfolio that has a blend of equity and income strategies, where the weightings are changed according to the macroeconomic outlook.’
For example, he said, it was clear at the start of this year that central banks were going to have to raise rates and reduce liquidity. ‘The extent to which it affected us has been magnified by Ukraine and issues in China, but we knew it was coming. So a portfolio of high quality, pure equity boutiques and high quality, pure income boutiques could be managed by a long-only portfolio manager who is taking a view on the global macro.
‘That to my mind is where we would be going into what hedge fund managers are saying they do. But I believe it can be done in a way that is much more fee-friendly for the client.’