Hendrik du Toit, CEO, Investec AM, interview

Hendrik du Toit, CEO, Investec AM, interview

Investec Asset Management remains the only significant investment manager to emerge on the world stage from Africa, and among very few from emerging markets.

Hendrik du Toit was there from the very beginning, joining Investec Group in 1991 and founding the asset management arm. He remains its chief executive and manages $105bn for its worldwide client base.

Today, Investec’s original African business is still big but it no longer dominates the firm – the UK is a near second and much of its recent growth emanates from the US.

“The Americas was our best-performing region over the past year in terms of new business flows,” says du Toit, and he reports “substantial” flows from Asia, Australia and the Middle East. It targets a global client base of the “300 largest and most sophisticated” asset owners and platforms and has mid-sized businesses in its two core markets, the UK and South Africa.

Du Toit says capital increasingly looks for opportunities around the world, as investors have become less concerned about geographic distance. This has resulted in about 50% of Investec’s deployed capital having something to do with emerging markets.

“The world is becoming flatter and the dividing line between the developed and emerging markets is disappearing.” However, he adds that investors are confident moving out of their comfort zone either geographically or in terms of asset class – but not both.

“They only go non-traditional near home.” Investec is organised around seven core investment capabilities. Funds are therefore defined by manager skill rather than geographical boundaries or asset class. Some of these lend themselves to liquid or some illiquid investments, others hedge fund styles. Du Toit resists the boundary between hedge funds and long-only funds, pointing out that long-only management is essentially just an index plus a hedge.

“It is a fiction of the client’s imagination, the clients who like to live their financial lives in Mayfair. We just think, if you have a skill, you must think about how you want to express it.”

He sees the industry evolving, with active investment managers moving into more challenging areas with Investec’s frontier and emerging markets business, for example, moving into private equity and private debt instruments to compliment its liquid holdings.

“If you are skills-based you do not first think about the wrapper, you do that afterwards.” Rather, the manager’s skill-set guides the strategy, and the best way of expressing that skill determines the asset class. “That is what creates sustainable alpha.”

He has no interest in running passive funds as “life is too boring then” and “you have to do things which are consistent with your personality as a firm and your culture as a firm, otherwise you will not succeed. You just cannot do everything”.

Some wonder whether the traditional asset managers will be squeezed between investors becoming attracted by cheap passive funds for beta on one hand and pure-alpha hedge funds on the other. However, “There has been pressure on the middle ever since I can remember,” says du Toit, adding that there is no reason why mid-sized firms cannot be competitive.

“There is a minimum scale but, once you are above that minimum scale, the bar is not nearly as high as people portray because there are also diseconomies of scale. We run the same operating margin as firms two or three times our size.”

Big game hunting
It is perhaps too early for conservative investors such as UK pension schemes to seek out opportunities in Africa – but this day may not be too far off. Investec is well positioned if investors start to favour Africa, which has has been mooted for some time but has yet really to materialise.

African investments have not performed well in 2013, with the South African rand hitting a four-year low on the back of weak commodity exports, resulting from labour disputes and weakening Chinese growth, and a surge of capital from emerging markets towards the US in expectation of the end of quantitative easing (QE).

“We did not dig enough commodities out of the ground because we were arguing about the rights and who should be doing what. There has been a change in perception about all commodity countries. The emerging market debt drive is continuing, but there has been an outflow from equities and there have been no big FDI projects following the world cup. And the political situation also is just not that compelling.

“We are going through a phase where emerging markets have feet of clay and people are becoming more rational about them, which is normally a great time to invest. People have predicted South Africa’s demise since its inception.

“One does not need to be apocalyptic, but South Africa is going through a difficult phase. It has neglected its social agenda – education for the people and creating sustainable work. It has been quite successful over the past 20 years but it has not dealt with some key structural problems, and that is coming home to roost.

“The miners’ strike is not about the mines. It is about social conditions, and that is spreading in the country.” Indeed, anecdotally it has spread to other industries but there is not yet sufficient political focus among government, unions and business to satisfy workers. “My view is it is becoming a serious political topic … and it will get attention.”

Contrarians may be tempted by Africa. Despite the current problems there are many reasons to be optimistic. “Long term, the Africa story will be very positive. It is a continent where there is now a race to growth, rather than just a race for human rights or something else.”

He believes a domino effect could take hold, as it did among Asian countries vying to be the next tiger economy. “It is a dynamic that is incredibly powerful. We need a Singapore to come through, led by a Lee Kuan Yew.”

However, du Toit says South Africa “is not going to provide the growth spark” as it already has the biggest economy and is the biggest foreign direct investor in the continent, ahead of China and US. “The exciting action has to happen in Nigeria. They say it will never happen, until it happens. Just like in Brazil, until one day Lula rocked up and made it happen.”

He notes that today’s Nigerian magnates, such as Africa’s richest man Aliko Dangote, owe their success to business acumen rather than connections with government. Beyond Nigeria, he says Kenya and Rwanda are countries to watch, as is Uganda once it overcomes certain issues.

But perhaps the most exciting prospect is Mozambique, a beautiful, competentlyrun country that has just discovered the third-largest gas deposit offshore. It also borders South Africa and is on the Indian Ocean, so a pipeline can be built directly to China – “What more do you want?”

Surviving volatility
Du Toit acknowledges that firms such as Investec have been beneficiaries of QE in the west, as it created a wave of money looking for yield and the firm had “lovely” results for the last financial year. However, he recognises that the industry faces dangers, which may only have been postponed.

“Our industry remains vulnerable to true instability in the world economy. You cannot hide from that. I am worried about inappropriate regulation and the risks involved in the exit process from QE. And the world is politically more dangerous than it has been since the Cold War.”

He is also concerned that governments will try to inflate their way out of debt. “How do you invest money in that? Inflation protection is at the back of my mind.” He says there is a case for real assets, which is why he perseveres with a commodities business despite them it becoming unfashionable.

He believes we are only “halfway through the commodities story” and says his firm could easily build more investment capacity. “There is a case for real assets and there is a case for investing in businesses, as they protect themselves better against inflation than a piece of paper called bonds.”

That said, he is “enormously optimistic” about the momentum for growth stemming from the raw desire of people around the world to improve their lot. Opportunities constantly open up, following the mini-boom in emerging market debt in recent years.

“I am trying to find something we can think about for the next 10 years – it takes five years just to build something. We are like a mining business – very long gestation. If you do not do these things early, you cannot deliver for clients. They move very quickly and they are getting quicker and quicker. They never used to change, now they are dynamic.”