It’s an indictment of SA’s broken economy that highly rated fund manager Neil Brown is quitting the markets cold turkey after 28 years. It comes after a bruising year in which his company Electus, which he and Richard Hasson started in mid-2015 after they left Old Mutual, is shutting down — a victim of SA’s truly horrid economy, even before Covid-19.
"It was really the only decision we could take," Brown told the FM this week. "We performed really well in our first three years, being top quartile for the one-and three-year periods to end-2018, but last year, despite our decent track record, we needed to win some new money and we just weren’t able to." In 2019, Electus’s performance dropped and, combined with some large client withdrawals, the R3bn it was managing the year before declined to R1.5bn.
Then Covid-19 hit and the market plunged 24% in three months — and Electus’s funds under management fell to R1bn. Brown thought Electus had enough money for a rainy day, but it wasn’t enough to withstand a tsunami.
Electus’s closure is awful news, not least because Brown was one of the savviest people around. Before the Steinhoff bubble burst, for example, he was one of the few who smelt a rat when it came to Markus Jooste’s almost hypnotic control over his executives. But unlike larger fund managers, Electus only offered equity funds specialising in SA, so when the local economy began choking, it couldn’t do what larger rivals did — shift funds to offshore shares or bonds.
Now, Brown says, he’s leaving the industry.
"When we started Electus, Richard and I said that this would be the last job we’d have. For myself, I’ve got no real idea what I’ll do from July. I’m keen to have a bit more time to relax, to explore a nonexecutive role at an asset manager, [and] do some NGO work, maybe looking at education and sport," he says.
Disturbingly, Electus may not be the last asset manager to buckle this year. The stresses Brown describes — falling value of funds and client withdrawals — aren’t likely to ease in the next few months. In the six months to March, general equity unit trusts in SA lost, on average, 22% of their value.
Even in overseas markets, where there’s more stimulus, fund managers are battling. This week, data provider Morningstar reported that investors withdrew €246bn held in mutual funds in Europe during March due to Covid-19. This was, the Financial Times reported, "a number that dwarfs the worst month in the global financial crisis [of 2008]".
Neil Brown thought Electus had enough money for a rainy day, but it wasn’t enough to withstand a tsunami
Fitch Ratings also reported this week that 76 investment funds in Europe, managing $40bn, were under such pressure that they weren’t able to repay all the investors looking to withdraw their money.
It’s the sort of toxic environment where the smallest asset managers will struggle. Brown says the biggest independent companies — like Coronation, Allan Gray and Investec — will be the biggest beneficiaries of this trend.
"There are also midsized independent firms which have started in the past 20 years that have reached large critical mass and should do well, like Abax and Kagiso. But institutional investors and advisers ... will be more fearful of their own career risk, and will probably be more wary about investing with someone who isn’t at least midsized and bulletproof," he says.
But for Covid-19, would Electus have survived?
"No, I don’t think so," says Brown. "Had we grown our assets from R3bn to over R5bn we would have, but that didn’t happen. In early February, we held talks with a few black-empowerment investors ... but then Covid hit, and nobody was going to do any deal involving [new capital]".
Brown is phlegmatic about it all. But his departure will rob the industry of someone who’s lived through the crashes of 1998 (the Asian crisis), 2001 (the dot-com crash) and 2008 (the global financial crisis). The corona crash, he says, is at an early stage — but may cut deeper and last longer than any of those earlier ones.
"In August 1998, the world fell apart. Suddenly everyone wanted to withdraw their funds, so I had to aggressively try raise [those] funds ... It lasted about a month and was incredibly stressful — such a sharp crack and steep sell-off," he says. By contrast, the global financial crisis in August 2008 lasted almost six months before the momentum shifted, thanks to a huge stimulus in early 2009. Today with Covid-19, fund managers, who’re paid to predict where things will be in a few years, have no clue how to forecast anything.
What we’re looking at now, says Brown, is at least a three-year story. "Our best guess is that it’s likely there’ll be a vaccine in mid-2021, and consumers and companies will only truly start picking up some confidence and momentum after that. Only at the end of 2022 are you likely to see SA-based company profits recovering to what they were in late 2019."
This creates a dilemma for investors. Otherwise-solid SA companies are likely to have huge falls in profit next year, and may halt paying dividends. The question, says Brown, is whether you hold all of these good SA-based companies for the next three years, especially given the risk of what else can go wrong in the local economy.
It’s a valid question. As Electus’s own fate illustrates, there were many good companies battling to survive SA’s economy even before the virus. Projecting accurately where they’ll be in three years’ time will require a leap of faith and some pretty lucky educated guesses.
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