“The whole emerging market category is a temporary phenomenon and is going to disappear over time. We believe the world is going to work as global and frontier [markets],” he says. “This economic power shift to the East has created a new set of opportunities and that really excites me.”
The way people view the world has already begun to change, but in du Toit’s opinion, there is still a long way to go.
“The growing importance of the G20 is an admission that the G7 no longer runs the world and change is slowly coming through. But unfortunately investment benchmarks have yet to reflect this change. They are always somewhat behind the curve and yet we are forced to live by clients’ benchmarks,” he says.
But this does not lead to complacency. “We have our opinion on what the world is going to look like and we know how to develop our capabilities to match the future,” says du Toit.
And the future, according to Investec, means equal opportunity across the globe.
Du Toit says: “The world is already a much flatter place. The relative opportunity in the East, West, North and South is very similar now and standards are a lot more similar than people want to imply.”
To compare industries in the East and West, du Toit gives an example from the world of popular culture. “Who says Hollywood makes better movies than Bollywood?” he asks.
“We always said that if we build our global capability right, we are, in a way, hedged against changes in the world and therefore we don’t care if one region wins over another.”
This view of the world affects the way Investec looks for clients.
“We don’t go to find clients where money is being made; we go where there are pools of existing assets. We take the clients’ money to where money is being made, or to where assets are cheap, and invest it there,” says du Toit.
Developing nations’ pension schemes and sovereign wealth funds are the main generators of savings [see article on p18] and “there is a lot of real money to manage”.
But although the opportunity in these nascent markets is clear, du Toit warns: “We have to make it interesting for our investors. Ultimately, you have to do interesting things to keep the smart people because if you do boring things, they’ll go somewhere else.”
The financial crisis has led to an increased focus on fund manager skill and du Toit says: “Fund managers are not there to do the mundane operational tasks, they are there to understand the markets in which they operate.” And nowhere is this more important than in frontier regions.
Du Toit says: “Frontier investing is a long-term, absolute-oriented investment style. It is very fundamental, very deep. It requires massive analysis. It’s not just about reading a company’s annual report because that report may not reflect any reality of the business.
“I don’t think you can understand liquid markets well if you don’t have a sense of what’s going on in private markets.”
But the question is, which countries does du Toit consider to be frontier?
“There’s a huge debate about what is a frontier market and what is not. I would say frontier markets are those that are difficult, where either the political or regulatory risk is much greater than in normal markets,” he says. In view of this, du Toit says he would not consider Brazil to be a frontier market, although Russia can be one from time to time. Some parts of Latin America and the belly of Asia are most definitely frontier. As is Africa, Investec’s home turf.
Du Toit says: “The challenge of doing business in frontier regions is whether that business is scalable. You need to know one country very well in order to be successful. It’s about connections; you need to know people who know people, but, without a doubt, there is margin and opportunity in these regions; Africa alone is a billion-person continent.”
The firm’s roots are firmly planted in African soil, although whether South Africa can be classed as frontier is arguable. But du Toit says that hailing from a small nation has boosted Investec’s global stance. “Having started in a small country we’re more global than managers who, for example, began in the UK, because we had no choice but to be global in our outlook.”
The changing global landscape is not the only thing that Investec is keeping in its sights. The financial crisis showed that managers need to be more attuned to their clients
needs – something that was forgotten during the bull markets.
“It took us a few years to realise how much clients actually matter. The way you interact with clients, the way you listen to them and reflect back what they tell you is important in building a sticky business,” du Toit says.
In addition to the growing importance of emerging market national pension schemes and SWFs, du Toit talks about another of Investec’s client groups that has been in hibernation for the last couple of years and is now waking from its slumber: global fund distributors.
“We worked very hard to get on all the global distributors’ platforms, only to have some of them implode after the Lehman Brothers collapse.
“This client group is now coming back and our hard work is paying off, albeit a bit later and a bit less efficiently than we expected. But if you want to be a global firm you have to engage those global distributors,” du Toit says.
He is seeing the resurgence of the global distributor and, in a way, the crisis helped push this client group towards firms like Investec Asset Management. Du Toit says: “For years they went to exotic asset classes, like hedge funds. Now they’re coming back to more traditional products.”
But this does not mean that the road is smooth, because in spite of the work the firm had done to build relationships with these firms before the crisis hit, things have changed since then. “They reorganised themselves so now we have got to engage these distributors afresh,” says du Toit.
Although it is challenging, du Toit says Investec has the fighting weight to deal with it. He explains that Investec’s mid-sized status helps in its relationships with such organisations. “We are no threat to them, but we have the strength to deal with them. We have the technical expertise to link up things to their back offices.”
©2010 funds europe