The Wealthtech Opportunity

How wealthtech can revitalise the asset management sector in Africa

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Let’s take a big, overarching look at economic growth curves. The value of companies across the old economy may be stable, but it is not going to grow much. In contrast, the value of companies in the digital economy can grow on a quadratic curve, albeit with high volatility. It is no coincidence that the growth of Internet traffic is also exhibiting a quadratic curve. I firmly believe that the value of companies in the digital economy will expand in proportion to Internet traffic. As we focus on the digital economy, our shareholder value has also increased steadily along a quadratic curve. I remain confident that this growth will continue into the future - Softbank CEO Masayoshi Son.

Introduction

Today I am going to tackle a topic that I am very passionate about. The wealth and asset management industry and particularly how technology can drive a better product market fit for incumbents in the industry. Ultimately, it could turn out that the incumbents will be left behind and new digitally native players will take all the market share. The article will start with an overview of the current asset management/wealth industry in Africa and will be followed by a discussion on the mega-trends that will shape the wealth industry followed by a review of some of the companies innovating within the wealth management space.

The basic premise is that the current wealth management industry in Africa suffers from a product-market fit problem. On the one hand, poorly performing local stock markets have a direct impact on the quality of the product offering; whilst on the other hand, a brick and mortar legacy significantly impacts distribution.

Wealthtech generally refers to technology that aims to improve the provision of wealth management and investment services. I view it to be a sub-set of Fintech. Wealthtech could include back-office services such as execution, settlement and custody as well as front-office services such as consumer apps, distribution and marketing. Elements such as robo-advisory and the inclusion of artificial intelligence also fall under the broad umbrella of wealthtech. It joins fintech and insurtech as one of the many portmanteau that we’ll all have to live with.

Overview of Current Wealth Industry in Africa

The asset management industry in Africa is diverse in terms of size and complexity. South Africa has one of the most advanced markets with Assets under Management (AUM) totalling US$ 155 billion as of June 2020. Precise figures on total AUM in Africa are difficult to come by but estimates by BCG and AfrAsia estimate the size of the wealth sector to range between US$ 1.6 trillion and US$ 2.1 trillion. This is a very small share of the global wealth management sector that is estimated at US$ 226 trillion by BCG. Nonetheless, Africa and Asia have shown the most robust growth.

Source: Boston Consulting Group

Looking at the Mutual Fund industry, the Nigerian market has AUMs of approximately US$ 4.0 billion with the Kenyan market just above US$ 1.0 billion as of Q4 2020. The Nigerian market has grown at a CAGR of 43% over this period. South Africa therefore is significantly bigger than both markets in terms of size and also has a wider array of product offerings. The Kenyan market is dominated by money market funds whilst mixed funds dominate both the Nigerian and South African market.

Zeroing in on Kenya, one notes that the industry is largely set up in the industry 3.0 format. Industry 3.0 is a mental model I find useful for analysing a firm's interaction with its clients and its business structure. It is underpinned by 4 key factors;

1. Standard product development largely unchanged over a long period;

2. Competition on price and brand positioning - You often see money market funds competing on the interest rate offered;

3. Segmentation of customers into large “homogenous” groups;

4. Built for physical distribution and client relationships as well as manual on-boarding;

These same factors have been alluded to in previous posts about core banking platforms with reference to both banks and core banking system vendors as well as an older post about the insurance industry. The industry is thus set up to package investment offerings sourced from bond, equity and property markets into standardised products sold to customers. These products are mostly in the form of unit trusts, Real Estate Investment Trusts (Reits - although these are rare) and discretionary funds targeted at the more affluent.

In addition, when analysing Kenya and extrapolating into other markets - the investment world from the client perspective includes alternative investments such as Savings and Credit Cooperative Organisations (Saccos) and Rotating Credit and Savings Associations (ROSCAs). The latter are known as “chamas” in Kenya and “Stokvel’s” in South Africa. 

The diagram below shows the typical industry structure especially how products are packaged and sold to clients. The main players in these markets are large continental giants such as Standard Bank, Old Mutual, Coronation Asset Managers, Allan Grey, Britam in Kenya as well as offerings from various fund groups. 

This production framework has been in place for many years and is now facing significant challenges. 

Lack of Raw Materials

If you consider bond and equity markets as raw materials that go into the creation of investment products, then the African experience in both markets has been quite poor over the last decade. The charts below show that the three main markets in Sub-Saharan Africa, Johannesburg, Nigeria and Nairobi Stock exchanges have had sideways movement over the last 10 years. The South African market has been dominated by Naspers which accounts for over 20% of the JSE. In Kenya, Safaricom accounts for an embarrassing 63% of the stock market value. In Nigeria, Dangote and MTN account for 36% of the market with the top six companies accounting for 71% of the market cap.

The case of Naspers is an outlier as this valuation growth has been driven by their stake in Tencent which is considered as one of the best investments of all time. Nonetheless, a key theme that has emerged that warrants further discussion is the role of technology in driving the value of Safaricom, MTN Nigeria and Naspers.

Source: Trading Economics

Essentially, the performance of the local stock markets which mirrors the European stock markets is partly an outcome of industrial policy and the production structures. These markets are yet to embrace industry 4.0 which is driven by technology particularly AI and data. It is thus noteworthy that the few companies which have technology at the heart of their growth stories such as Safaricom and MTN have done well.

Within all this is the fact that global venture capital is financing the bulk of African start-ups from seed level to later rounds. The story of Paystack being acquired by Stripe is a worrying sign for local stock markets. The large tech companies being built in Africa will likely not end up being listed in Africa.

Additionally bond markets have been affected by various factors. In Kenya, the interest rate cap has paralysed the Central Bank Rate which is supposed to be the monetary policy rate. With a rate cap that is pegged on the CBR, the Central Bank hasn’t had the flexibility to raise the CBR so as to strengthen the currency. This coupled with an open capital account and loose global monetary conditions has lowered rates across the board leading to a peculiar situation where local rates are low whilst the currency is weakening. This has had the impact of putting downward pressure on what investors can get from money market funds.

Poor raw materials naturally lead to poor products and this has been the situation with the African mutual fund industry, particularly Kenya. 

Distribution

Compounding the situation described above has been a sub-optimal sales and distribution framework. There is a lot of friction in the mutual fund onboarding process at least from personal experience. Indeed, even bankers who are supposed to be financially savvy don’t even know about money market funds in most cases. The issues stem from;