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The state of the SA asset management industry

In this paper, I will address the fundamental question of what leadership is, how do I learn it and how do I practice it in the asset management industry today. Please note that I have elected to focus my leadership project on the asset management industry instead of the insurance industry as outlined in the leadership framework briefing. Most of my work experiences have been primarily centered around the asset management industry and I believe that my project would have a meaningful impact in terms of my learning by focusing on the industry that I have exposure to.

Several sets of challenges are facing the South African asset management industry. In part and like in all businesses in South Africa, most of them have their origins in the legacy of apartheid in terms of human capital deficit and the need for social, economic and political transformation. In this project I will not deal with all challenges that the industry is faced with but will only focus on strategic factors that have direct or indirect implications on the type of leadership that is essential in leading this industry into the future.

The asset management sector has been under extreme pressure for the past three years as a result of the steep and prolonged decline in the equity markets. Fee income has fallen sharply as investors have moved away from the traditional growth and value funds toward fixed-income and alternative products. Achieving profitability in a lower-fee environment, aligning product and distribution channels, and sustaining growth in management company valuations are primary challenges facing asset managers in the months ahead .

Since the transformation of our society and in addressing some of the social and economic imbalances created by the previous political regime, pension funds constituent are demanding investments in alternative products, such as socially responsible investment products. These investments are also known as targeted or developmental investment. The primary proposition of these funds is levering pension fund money by investing in infrastructure development projects that have a strong social upliftment or impact overlay. These investments are targeted at addressing infrastructure backlogs in the country, such as housing. Therefore, to remain profitable and competitive, there’s an urgent need for companies within the industry to be able to meet the changing needs of their clients.

There has been a big move in the industry for companies to become to black empowered. I would argue, (without having done any research) that the asset management industry is probably the most advanced industry in South Africa in terms of complying with BEE policy. Most asset managers, including Futuregrowth and African Harvest Managers, took a lead and had a competitive advantage for a long period being recognised as empowered companies in terms of ownership, staff composition and the nature of products and services offered. In response to this competitive pressure, a need for transformation and primarily to secure business from government and some major institutional government, parastatals and corporate pension funds, most companies within the industry had no choice but to comply with BEE policy. More emphasis is also placed on being compliant with respect to the Employment Equity Act (EEA) and Skills Development Act. With BEE policy likely to be legislated in certain industries and major clients placing strict requirements on companies for BEE policy implementation, we have recently seen some companies positioning themselves to comply with BEE policy. The prime example is one of the major Banks, Investec Ltd, which recently concluded what was referred to as a landmark BEE transaction in the financial services industry, by selling off 25.1% of its shareholding to black economic empowerment companies and staff.

Furthermore, the Financial Services charter is currently in draft and there’s debate whether this charter should be legislated or not. The challenge here is that those companies that are resistant or passive about transformation will have no choice but to adopt to the need for change in order to survive in the long-term. Further, the companies that do not play by the rules run the risk of been seen as breaching corporate governance rules.

The asset management industry is very competitive. Generally, bigger companies with long track records dominate the market. The survival techniques essential in this industry are cutting edge innovation in terms of product offerings and solutions, consistently outperforming the market and competitors and the ability to retain clients. Furthermore, the traditional asset management market is saturated with a lot of asset managers chasing after the same money. Emerging and existing Black Empowered companies still have a competitive advantage in attracting and retaining funds based on their empowerment credentials but this is now threatened as some of the major asset management companies are contemplating becoming black empowered following suit in Investec’s feet.

Furthermore, the industry is very competitive in term of employing the best people in the industry. Most companies compete to attract, retain and pay for top professionals available in the market. With BEE so topical now, especially in terms of the EE Act, most companies are on the look out for top Black and women professionals.

Following the recent corporate scandals of companies such as Enron, Worldcom, Leisurenet, Regal Bank, and other, corporate governance has become a topical issue in the industry. The use of the King 2 report has become imperative to ensure that companies comply with generally accepted corporate governance rules. This is very important in this industry since asset managers have fiduciary duties to pension fund trustees and integrity is the name of the game.

In order to ensure that we sustain our recovery and our position as the major driving force for Africa, we must continue to develop leaders that are in touch with the needs of our people and our country. True leaders understand that their role can be a lonely one – that to live the dream is not easy – that it requires strong qualities of toughness, vision, compassion empathy and understanding. This is the real challenge that lies before us. We must tap into the collective consciousness of our people and provide them with inspirational leadership and the tools to help them create the future.

What do these factors mean in terms of challenges and leadership?

All of the factors discussed above present a lot challenges for the asset management industry and more especially in terms of the leadership that is required to address all of the factors and much more. The overall challenge for the industry is having the leadership capability that will successfully d, lead the industry through phases of change and challenges. The main question that needs to be addresses is whether we have such leaders, and if we not, how does the industry develop such leadership?

The prime task of business leaders today must be to create a visionary company. It is argued and in some instances it has been proven that visionary companies are the ultimate winners in business today. They become premier institutions in their industries, making a profound impact in the world around them; operating successfully for many years, they lead markets, adapt rapidly to change and new challenges and consistently outperform competitors. The industry is challenged with developing and acquiring leadership capability that will ensure that the industry is successful in adapting to changes with respect to a threats on profitability, meeting clients needs and staying competitive.

One of the main challenges that the industry faces is the lack or scarcity of a leadership that is in touch with the needs of the people and the country. This relates specific to the need for transformation and the role that the South African business can play in leading and creating solution to address the social and economic needs of the new society. For instance, most companies have been resistant in embracing BEE policy. The challenge in this case is the every company buy into the vision of transformation. What this implies for companies is the need to make policies, such as BEE an integral part of the vision and strategy and to have BEE objectives in every component of their business. Most companies would need to take into consideration that there would definitely be long-term implications for companies in terms of adapting to transformation needs. Do we have the leadership that understands the need and vision for transformation? And is not how do we go about addressing the need?

Furthermore, companies having to comply with the EE act, meaning that the composition of the workforce is becoming more diverse. Companies are currently faced with the task of ensuring that there is some level of diversity in their workforce. Employers have to hire and motivate minorities, women, and others different from the mainstream in age, appearance, physical ability, experience, and life-style. Diversity in an organisation includes differences in age, gender, ethnicity, race, religious affiliation, thinking style, physical appearance and abilities, educational background, and even sexual orientation. Furthermore, diversity encompasses factors or attributes that are less visible such as technical abilities, functional background, personality characteristics and values, etc. Although organizations can achieve a level of diversity in their workforce, they are constantly faced with the challenge of managing diversity. Managing diversity is the process of creating and maintaining an environment that enables all participants to contribute to their full potential in pursuit of organizational objectives (R. Roosevelt Thomas, Jr., D.B.A.). Managing diversity looks at ways to address the differences that impact the work place but at the same time leveraging from the similarities that exist. This process is geared towards unlocking the potential and at the same time maximizing the contribution of all employees by eliminating and/or reducing the barriers that stand in the way of inclusion and full participation. Therefore, diversify seems to address issues related to human resources, internal communications, interpersonal relationships, conflict resolution, quality, productivity, and efficiency. Furthermore, with the skill development act, companies are required to create a work environment that caters for optimised learning, training and personal development. This would require inspirational leadership to tap into the collective potential of the workforce and provide supportive tools for them to create the future.

Most companies have good managers and have not spent time and resources in developing leadership. In most instances companies fail to realise the difference between managers and leaders. For example, companies have recruited people that are good at managing assets and processes, however in most cases you find that the same people are worst leaders in terms of creating a future for both the company and its people. John Kotter states that leadership and management are different. According to Kotter management is about coping with complexity. Good management, through its practices and procedures, brings a degree of order and consistency to key dimensions like quality and profitability of products. He further, goes on to say that Leadership, by contrast, is about coping with change. He argues that in recent years the business world has become more competitive and volatile. Changes in factors such faster technology, intense competition, change in workforce demographics demands more leadership than management. The industry needs to focus on developing leaders and to recognise that leadership complements management, and dos not necessarily replace it.

Given the challenges facing the asset management industry today, what type of leadership is required in addressing these challenges, how do I learn it and practice it. There are obviously a lot of possible answers as discussed above. One cannot not deny the fact that there is a great need to birth and continuously develop a leadership that thinks, acts and influences others in ways that enhances and sustains competitive advantage of the entire industry. In this project I will look at the different theories surrounding leadership to help me formulate my own theory of leadership. I will further make use reflective, action and experimental learning in an attempt to find answers or leadership strategies that are required to develop the leadership required by asset management industry given the challenges discussed above.

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