- 10X Investments is planning to buy 100% of CoreShares.
- The companies want to multiply their merged R31 billion in assets under management fivefold to R150 billion.
- 10X plans to improve its black ownership to attract pension funds, and once it has economies of scale, it wants to reduce its fees further.
The looming marriage between two of South Africa's passive investment firms, CoreShares and 10X Investments, has foundations of ambitious targets.
10X Investments recently announced that it is planning to buy 100% of CoreShares. Once merged, the two companies will create a R31 billion index-tracking business. But they want to grow their assets under management to at least R150 billion, as a start.
"We really have very aggressive targets. That's because it's really at around R100 billion where we'll start seeing the real efficiencies coming through. So, our ambition is to grow very fast," said 10X Investments CEO Tobie van Heerden.
In a country where money flowing into passive investments remains lower than the global average, Van Heerden thinks there's massive growth to unlock. He estimates that only about 8% of SA's savings are invested in mutual funds. And only 2% of institutional investors' money from pension funds goes to index funds in SA.
A massive growth opportunity
While SA has warmed up to passive investing in the past few years, money flowing to index-tracking managers and exchange-traded funds (ETFs) is still a drop in the ocean of the country's estimated R8.5-trillion savings pool.
But in developed markets, passive investing is a thriving industry. It has created giants like Vanguard and BlackRock iShares, who respectively manage over US$7.2 trillion and US$2 trillion assets on behalf of its clients.
Van Heerden said he and his team have crunched numbers many times since he became the CEO in September last year. They believe that amassing R150 billion in assets under management is "doable". But if South African investors warm up to passive investing more – and 10X has plans to aid that – that 2% of institutional money going towards the sector could increase to 10%.
"If the market comes behind us here, R300 billion ... R350 billion is not far off," he said.
Even though 10X opened for business in 2007, it still has four investment products and caters only for retirement savers. Even in the retirement space, it has only been targeting retail investors. Neither 10X nor CoreShares has made its mark in the institutional space.
When Van Heerden came in from NinetyOne, his immediate goal was to expand and become a full-service asset manager. And buying CoreShares will give 10X the specialist products it needs to attract institutional investors and advisors who tend to look for those to diversify their clients' risk.
CoreShares will also bring a range of ETF funds as it is already managing a R5 billion ETF book. Van Heerden said that alone will make 10X a "proper" passive player.
But Van Heerden is well aware that there's still work to do if it wants to get to R150 billion. Institutional investors in SA are putting more and more emphasis on black ownership. And 10X is not there yet.
"What we are working on at the moment is a vehicle that will cover those aspects [institutional investors look for] very well. We will hopefully announce that in the next couple of weeks. We will be able to give institutional investors what they are looking for," said Van Heerden.
He said as a passive investment manager, 10X has an advantage where pension funds are looking for companies with lower fees. But it struggles to convince those investors who believe that, as an emerging market, SA can produce much higher returns than indices used as benchmarks. And he thinks the lower passive players can push their fees, the more pronounced the value of investing in index funds will be.
"I think there's still ... room for us in South Africa to get to a proper fee differentiator between active and passive investing … As our scale increases, we can then get fees down and price efficiencies better. That will lead us to a price differentiation that will force even more investors to move," said Van Heerden.