Allan Gray’s outgoing CIO Andrew Lapping reflects: ‘It has been about outperforming Naspers.’ After two decades with Allan Gray, Andrew Lapping will be stepping down as the firm’s CIO at the end of August. Duncan Artus will take over the role.
As the head of the investment team at South Africa’s largest asset manager, Lapping has been a significant figure in the local industry. And he has some noteworthy insights into how it has shifted since the turn of the century.
‘The market is definitely more competitive,’ said Lapping. ‘There are far more players now, and 20 years ago the big players were still the life companies. The weight of active money has definitely shifted to independent asset management firms.’
A new approach
The second big change is the recognition of the significance of ESG (environmental, social and governance factors).
‘Twenty years ago we didn’t even vote at AGMs unless it was a controversial issue,’ said Lapping. ‘How seriously we take voting now, and how we think about engagement with boards, is a big change. The whole interaction between asset managers and companies around governance initially, and more recently the social and environmental aspects, has become far more important.’
This trend has, however, come with its challenges, particularly when social and environmental issues are at play.
People have different opinions on what’s right or wrong, People can get angry about the way you vote.
said Lapping.
‘Thus far, we have held the line and vote what we think is right for the business and our clients. Looking after our clients is our first priority. Don’t forget that being long-term investors we want the businesses we invest in to be sustainable. If the business is acting in an unsustainable way, there is no point in investing in it.’
Passives on the rise
A big shift that has not yet come to South Africa to the same extent that it has in some other markets is passive investing. Lapping expects that passives will gain more market share locally, and that it will be interesting to see how the dynamic between active and passive plays out.
‘I think what you will find is that the world will go full circle,’ said Lapping. ‘You will see passives getting ever more market share, fees will come down further, and it will be harder and harder to be an active manager. ‘But because passive funds are not allocating capital in a way that sells expensive stocks and buys cheap stocks, you will get bigger distortions in the market. Those discrepancies will become huge, and you will see huge outperformance by active managers when the market readjusts.
‘When that happens, the money will flow back to active managers, and you will get this cycle.’
Finding the balance between the two, both for investors and the market more broadly, will be an interesting trend to watch. ‘There’s definitely a balance,’ said Lapping. ‘On average, passives beat the average manager – especially managers who are benchmark-cognisant. So, I think passives will find some kind of market share. I think that could be somewhere between 40% and 60%, and then you have a share of active to keep the market honest. But you can’t have passives going to 100% because then the free-rider concept stops working.’
The Naspers effect
Active equity managers in South Africa may not yet have had to define themselves against passives as much as managers elsewhere have, but there has nevertheless been a clear benchmark for performance over the past 20 years.
It has been about outperforming relative to Naspers, You’ve had this situation where Naspers has gone from zero to 25% of the market. If you didn’t own it, that’s a very steep hill to climb.
said Lapping.
This has business implications too
Overall, the big rand hedges – not just Naspers, but also stocks like Richemont and BHP – have done really well, and the small stocks have done terribly, Naturally active managers are looking for the smaller stocks. And, unfortunately, you are going to see some managers who specialise in those small stocks coming under pressure, which is sad.
said Lapping.
There are already signs of this impact. At the end of June, boutique mid- and small-cap specialist Electus closed its doors due a decline in assets under management.
Seeing value
Lapping nevertheless believes that the current environment presents a genuine opportunity for value-oriented managers in the South African market.
‘If you are a manager of money, I think you need to be able to keep conflicting concepts in your mind and not let one overwhelm the other,’ said Lapping. ‘It’s easy to become extremely negative, but usually we rely on other people doing that – selling stocks down so that we can take advantage.
‘Unfortunately, what happened with us is that sentiment last year towards South Africa was extremely negative and you saw aggressive selling pressure on local stocks, and financials in particular. We started accumulating stocks into that negativity, and then the Covid crisis hit.
‘What would have happened if we didn’t have the pandemic, I don’t know, but I think we would have found exceptional value in those companies,’ said Lapping. ‘And I think there’s still opportunity now if you look at the discrepancies between local and offshore valuations.’
Safe hands
Looking ahead, he believes Allan Gray is well positioned to benefit from this in the shorter-term. And over the longer-term he is extremely confident in the team he will be leaving in place.
‘Duncan is extremely passionate about the business and value investing,’ said Lapping. ‘The portfolio managers we have promoted are all people who believe in the process and philosophy, and that is going to stay very much intact.
‘That said, it is going to be hard,’ said Lapping. ‘It’s only going to get more competitive, and it’s only going to get harder. But, as a business, you have to continually, incrementally improve.
Sources: Citywire South Africa
