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Taking Stock Spring 2018

In conversation with Hendrik du Toit

13 November 2018
Author: Hendrik du ToitCo-CEO of Investec and founder of Investec Asset Management

Last month, Hendrik du Toit, founder of Investec Asset Management, replaced Stephen Koseff as CEO of Investec alongside Fani Titi. In the months ahead, Hendrik will oversee the demerger of Investec Asset Management and return as Executive Chairman to the company he founded 27 years ago. We spoke to Hendrik about the early days, the importance of embracing sustainability and the value of active management.

Tell us about your early days at Investec Asset Management

I first encountered Investec in the late eighties. They were running a very small investment banking business and they wanted to start an asset management division. I had a friend from school working there, who convinced me that it was quite an interesting place to work.

I resigned my job at Old Mutual, thinking that I was joining a big firm. They had less than R200 million under management! When I arrived, I was shown to an empty desk in the middle of the corporate finance team in Johannesburg. There was no one from HR to welcome me; there was no computer, but that was life at Investec and it was fantastic. It’s a ‘can do’ place. This business was built bottom-up by people who were given opportunities and I think that philosophy is so important.

At the time, they didn’t understand how asset management differed from corporate finance and trading. I had to explain what it meant to manage other people’s money, and the need for independence, and thus the reason for setting up shop in Cape Town.

What was your initial strategy for the business?

The toughest thing in any business is getting through the first five years. That’s when you have to bed things down. They were chaotic times. We had this idea that there was space for another competitor, even though it was an industry dominated by the big incumbents based in the major financial centres of the world. We believed we could do things differently and maybe even better. I used to think about Sir John Templeton, who ran money from an island. And I asked myself, if he could run money from an island, why can’t we run it from Cape Town? It has a better airport, it’s a nicer place and the coffee is better, so why not build the business from here and eventually internationalise?

What set us apart in the beginning was that we had a different view of the world. When we started life in the early 90s, people in South Africa were incredibly bearish. Everyone only saw the downside and the incumbent managers were hanging onto bonds. They wouldn’t touch equity below the large caps. We essentially pursued a mid-cap strategy; we bought the growth for the next decade and the multiple expansion, and thereby built a track record that allowed us to expand and serve our clients wherever they are.

Does that approach still hold today?

Yes, absolutely. Looking at the past decade, what drove us was that we believed in risk. We had a risk-on product set, while many were de-risking. If you panicked every time emerging markets had a little sneeze, you would have lost a lot of money, whereas, had you thought longer term and embraced risk, you would have done well.

Investec Asset Management is a serious global player but is classified as a mid-sized asset manager. Can we compete with the large-scale trillion-dollar asset managers?

In many things size matters. In this industry, size is but one of the components of strength but not the defining feature. It is about quality. It is about excellence. In banking, balance sheet size matters, but in this business, you must be big and strong enough to deal with the regulatory barriers.

We already do that, and unlike most mid-sized managers in the world, we have a full global footprint. We didn’t have a problem when they announced Brexit because we already had EU structures in place. In every country in which we operate we deal through the local regulators – we chose to be a cross-border player.

We are not yet at the size where we can muscle in. That is a good thing, because once you can start muscling in, you risk sacrificing the quality and the focus on the client. And as you get bigger, you also risk losing control, where the people at the top know less about what goes on in the business and more about the politics of the boardroom. Our business is never going to get there. If it gets there, we’ll break it up.

Can we be a serious global manager without a passive option?

Yes, because there are only going to be two or maximum three serious global passive managers. It’s a race where the pricing goes to zero, and only one or two scale players can live at one or two basis points. And by the way, those scale players who make real money, like BlackRock and Vanguard, have huge active businesses.

In the end, and this is really important, there are certain kinds of risks that give a certain kind of return which your clients need in a low-yield world. If you are in Brazil where you have massive real yields on government bonds, you can just lock them away. You can’t do that in Italy. You can’t do that in Germany. You actually have to take some risk.

Remember, the world is a different place from 2009, where all assets were depressed and central bankers were underwriting asset inflation with huge liquidity injections. It was the kind of market where you could buy passive and it was a sensible strategy. Today, we are in the midst of a massive transition, probably bigger than the industrial revolution, with both huge capital destruction and huge opportunities. If you are not going to try and allocate your money to where the winners are, you are going to stay with the losers. So, the promise of active is not that we are always going to outperform some index. The promise of active is that we are going to allocate capital sensibly to try and capture the huge opportunities. Active managers can also reduce risk through down-weighting large index shares or sectors.

What does the demerger of Investec Asset Management mean for clients and for your people?

We really thought about clients. When we worked out the strategy for the whole group, we asked ourselves how could we be best positioned to serve our respective client niches? For example, the Banking and Wealth Group are largely based in South Africa and the UK, with a small presence in Australia. For our business the biggest growth opportunity is in the Americas and Asia, although Africa and Europe remain very important markets. So, there was actually very little client overlap.

Looking ahead, Investec Asset Management is going to help clients who want to take active risk to achieve the returns over and above those targets and benchmarks in chosen markets using the best skill sets. We will organise this business around skill sets. As far as we are concerned, there is an addressable market for us of about 25-30 trillion US dollars. In that addressable market, we have a negligible market share.

Anything that is active, that needs a brain, that needs insight, that is difficult to do, that’s our business.

You are on the UN’s Business and Sustainable Development Commission. Sustainability has been close to your heart for many years. Do you see investors embracing it?

I grew up in Africa. I have seen what climate change can do to communities; I have seen what over-fishing can do; I have seen what deforestation can do; I have seen what pollution of rivers can do. It’s not a debate about climate change. We know that we – seven billion humans – have an excessive impact on this world.

We also know that we can’t make the whole world a game park or a museum. We must combine development and job creation with the protection of our natural resources. If we don’t, we are toast.

We are long-term investors. We are supposed to invest for the next generation and the generation after that. If we can’t even think about the consequences of our capital allocation beyond the next five years of dividends, then we are simply not doing our job. As we grow up and have children and grandchildren, we realise we can’t leave the world in its current state.

That is really the point. It is simple. It is about our collective future and all of us, wherever we work, have to do our little bit. We are very fortunate that as stewards of capital, we have a vote. Companies come and talk to us. We choose where to apply the capital.

It brings us back to the purpose of our business. We finally articulated it – and by the way, it took me and my colleagues 27 years to figure it out! We said it’s about building a better business, investing better and investing better for a better world. Better business, better investing, better world.

Hendrik du Toit
Hendrik du Toit Co-CEO of Investec and founder of Investec Asset Management


Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Any representation or opinion is provided for information purposes only. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management is an authorised financial services provider. Issued by Investec Asset Management, November 2018.

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