Mark Davids, Head Investment Strategy and Distribution – MOTSWEDI

The BEE goal posts keep getting moved

Benefits of surviving

The concentration of the South African fund management industry is well known, with 6 of the largest discretionary fund managers in the country managing more than 55% of the available long term savings and investment industry pool. The top 20 manage over 90%; keeping in mind that there are over 100 fully discretionary fund managers in the country. Examining the way the South African fund management industry developed, since 1994, it was always based on the survival of the good performers and those with good business acumen. But it must be clear that their success was also fundamentally based on the privilege of those entrepreneurs having access to capital and access to networks which allowed those businesses to get off the ground and grow.

BEE Level 1

Today, 19 of the top 20 biggest fund managers have a level 1 BEE status according to their BEE scorecards. This is impressive and from the perspective of these fund managers a job well done. From the perspective of many asset owners, this job is so well done why spend your time looking any further? But unfortunately, and especially from the perspective of black investors and professionals scepticisms abounds. When looking closer at many of the top 20 companies; are these businesses truly embedding transformation as a part of their business imperatives to grow and become truly diverse African business, or is it a matter of ticking the boxes to get the points. Sadly looking across the fund management industry after 30 years of freedom, the picture is not very encouraging.

Pass mark is what?

The scorecard in its current guise has five major categories where black representation or spend is required. Ownership, Management Control, Skills Development, procurement and ESD spend and socio economic development. What counts towards the BEE scorecard is the target in the various categories or what I call the pass mark, and how well the fund manager does relative to it. As an example in the Ownership category, the subcategory called “Economic interest rights in the measured entity to which black people are entitled” has pass mark of 25% representation. Whereas the companies achieving these Level 1 BEE scores are congratulating themselves, some deserved, other perhaps not, the true industry picture of transformation is not looking good.

The fund managers which reported in the Financial Sector Transformation Council (FSTC)  State of Transformation annual report 2019-2020 showed that the average fund manager failed on ownership, management control, skills development, supplier and enterprise development. Only passing on preferential procurement (the highest weighting on the scorecard) and socio-economic development.

The goal posts keep moving

Perhaps it’s the fault of the scorecard itself which makes the pass market too low and not enough of an incentive for transformation. But the suggestion of increasing the pass mark will invoke the counter argument of, when will the goal posts of transformation stop being moved and transformation is becoming an impediment to business. None the less, if we were to apply observed growth trends of surviving organically grown black fund managers over time which have successfully reached mainstream status, perhaps we could get a clue as to what a true Level I BEE black fund manager should look like. Something like:

• 75% black ownership
• 90% black board representation
• 70% black senior management representation
• 75% black investment team representation

Implication being that many of the current BEE level 1 companies may well drop to level 4, if not worse, how easily would these be accepted..?

Download the full report here: MOTSWEDI – Listed Investments Survey – February2023

ENDS