Core Chartbook 2024: Trends in rules-based investing

Insights

• The high growth rates for rules-based funds versus traditional active funds in South Africa is in line with  global trends. 
• The growth rates in rules-based funds in South African are higher than the global averages, mainly due to the SA market growing off a much lower base.
• Multi-asset strategies have seen the highest growth rates within the rules-based CIS industry, in part due to it providing the largest opportunity set. 

The global landscape

After a horrific 2022, markets posted a strong recovery during 2023 with the proverbial “tide that lifted all boats”. The global asset management industry grew by 12% during the year, which was nearly double its annual long-term growth rate of just under 7% (2005 to 2023). The rules-based market continued the trend of growing faster than the industry, up by 18% for the year. Over the past 18 years it has grown at nearly 11% per annum to increase market share from 10% to 22%. Traditional actively managed assets grew by a mere 4% per annum over this period, going from a market share of 71% to 45%.

While rules-based assets have seen robust growth, it still only makes up 4% of global asset management revenues. Alternatives however now make up over 50% of industry revenues which was $421 billion for the year in 2023. Over the past 18 years, industry revenues have grown in line with assets at around 6.4% per annum, while rules-based revenues have grown by 9.4% per annum. The demand for lower cost investment products by investors is well documented and one of the major drivers behind the growth in rules-based funds. The growth in alternatives may very well be explained by the old saying “financial products are sold, not bought” given the higher margin incentives.

Source: BCG, Global Asset Management Report 2024

The South African rules-based industry

The South African industry also benefited from the global market recovery, as total rules-based assets grew by 14% to end the year at R525 billion. Collective Investment Schemes (CIS), which includes unit trusts and Exchanged Traded Funds (ETF), grew by 19% over the year to an AUM of R320 billion. The CIS part of the rules-based market has seen the strongest growth over the past 9 years, growing at an annual rate of 26% compared to 17% for the total rules-based industry.

Source: Collective Investment Schemes – ASISA, Non-CIS – Old Mutual, Satrix, Sygnia’s financial results

In Part 1 of our article series we covered some of the key trends within the CIS Industry over the past three decades. Broadly speaking we are seeing the same global trends unfolding within the SA market where traditional actively managed funds are growing at a rate that is barely beating inflation, while rules-based funds are growing at double digits, albeit off a lower base. This has resulted in the rules-based market share growing from 2% to 9% of the CIS industry over the past 9 years.

Source: Collective Investment Schemes – ASISA

The growth areas within the CIS industry over the past three decades have been multi-asset, income and international funds. The rules-based funds have been the beneficiaries of these trends within the areas where it is easiest to implement rules-based investment strategies, namely multi-asset funds and market cap weighted asset classes such as SA Bonds and SA and Foreign equities.

Over the past nine calendar years we have seen consistent net flows into rules-based CIS funds, averaging around R19bn per annum. Market cap weighted and multi-asset funds have taken most of the net flows in South Africa over this period.

Rules-based market share within the largest fund categories

The South African Multi-Asset fund categories make up nearly half on the total CIS assets. The high growth rate described above has led to a rules-based market share of nearly 6% in this space. During 2023 these rules-based multi-asset fund attracted 15% of net flows within these categories.

Rules-based funds have the largest market share within the equity fund categories. Rules-based foreign equity funds, which includes the global and regional sub-categories, has a 37% market share while the SA equity funds are at 14%. In both these cases, both unit trusts and ETF versions are used by a broad spectrum of investors. Only the foreign equity categories have been able to attract net flows over the past two years, while SA equities were in line with the industry in not seeing any meaningful flows.

Source: Collective Investment Schemes – ASISA

This is the second article in the Core Chartbook series. To read Part 1: Long-term trends in the CIS indsutry, click here.

Disclaimer

Please note that Nedgroup Collective Investments (RF) Proprietary Limited is not authorised to and does not provide financial advice. This document is of a general nature and intended for information purposes only. It is not intended to address the circumstances of any investor and cannot be relied on as legal, tax or financial advice, either express or implied. Whilst we have taken all reasonable steps to ensure that the information in this document is accurate and current on an ongoing basis, Nedgroup Investments shall accept no responsibility or liability for any inaccuracies, errors or omissions relating to the information and topics covered in this document. Nedgroup Collective Investments (RF) Proprietary Limited is a member of the Association for Savings & Investment SA (ASISA).