Rules-based funds continue to grow at the expense of active across most markets, a reflection of investor preferences and the pressures on fees and costs in the industry.
This is clear in the findings of the Nedgroup Investments annual Core Chart book which illustrates the state of the entire rules-based industry in a series of interesting charts and data points.
According to the latest release, these trends are also across equity and fixed income. The term ‘Rules-based’ is an umbrella term for traditional passive funds, enhanced index funds and multi-asset passive funds.
The SA rules-based market is now nearly R336 billion in AUM, up from R229 billion in 2017. Collective Investment Schemes saw the strongest growth yet again in 2020 and account for 52% of the SA rules-based market.
Rules-based funds now make up nearly 25% of the foreign equity category and 11% of the SA equity category. In the SA multi-asset category, which is the largest fund category by AUM, rules-based funds account for 3.7%, up from 2.2% a few years ago. It’s becoming clear that this is a continuing trend across asset classes, as more and more investors see the benefit of lower costs on their investment growth.
According to the report, the South African Interest-bearing sector increased by 27% in 2020. Impressively, rules-based bond funds grew by over 94% as investors moved aggressively into SA Bond funds which now make up nearly 12% of the R114bn Bond (variable term) category.
Meanwhile, Rand-denominated offshore Feeder funds and ETFs also saw strong growth. In the foreign equity categories (global and regional combined) rules-based funds grew by over 44% while in the Global Multi-asset category they were up by over 25% year-on-year.
In spite of the growth in products available, scale remains crucial in terms of sustainability for asset managers and the local market is still dominated by a few key players. Satrix and Old Mutual are still the largest Rules-based fund management houses in SA, managing R122bn and R113bn in total assets (including Offshore) respectively. Sygnia, 10X and Nedgroup Investments all experienced annual growth of 20% each during 2020.
Over the 5-year period ending December 2020 Nedgroup Investments experienced growth of over 40% per annum!
The research highlighted the impact of fees on investor outcomes – one of the primary drivers of growth in the rules-based space.
The asset weighted peer group averages of the largest categories, before fees, seems to indicate that the SA market is highly competitive, and that most assets are managed by fund managers who deliver better return (asset weighted peer average is higher than the equally weighted peer average). After fees, however, the asset weighted peer averages all underperform the rules-based funds within their categories.