Why Graviton’s DFM deal with Portfolio Analytics matters for advisers

Speaker A: Foreign. Welcome to Money Markets and Masterminds, a citywide South Africa podcast that delves into the intricate world of finance, investment and strategic decision making. If you're a fund selector, uh, an independent financial advisor or an institutional investor looking for insights, analysis and expert opinions to enhance your perspective, you're in the right place. Here with me, editor, uh, Ruan Yoaster. It's this month's DFM discussion in October and I'm joined by Imran Yakut, head of Invest at Graviton, where he oversees the discretionary fund management proposition and he's going to talk about the business, the industry and everything in between. Imran, welcome to the podcast.

Speaker B: Thank you very much Iran. Thanks for having me.

Speaker A: You've worked across client services, fund research, implemented consulting, multi management and now dfm. How has that path shaped the way you think about building portfolios for advisors and their clients?

Speaker B: So from my perspective, I mean obviously in that, in that entire time um, I've worked by, primarily exclusively with financial uh, advisors um, and the different roles gave me different perspectives, whether that's from the operational dynamics of uh, a financial advisor, whether that's understanding um, the investment component as well. Um, so just that holistic view has given me quite a deep insight in terms of first on both sides of the spectrum, be that the advisor world, but also what happens in an investment team, how you make decisions, investment decisions, decisions, and how to effectively monitor that over time.

Speaker A: What did you learn about the practical challenges advisors face that you might not have seen from an investment role alone?

Speaker B: So what we found, I mean I certainly found this with um, investment professionals that have never really dealt with financial advisors that often there is a disconnect in terms of the type of things that an uh, underlying investor would look for and the type of pressure points that advisors really experience. So for me, having first um, sort of cut my teeth, so to speak in um, sort of client servicing and um, working directly with advisors, ah, each day once I entered a sort of a more investment focused sort of space, um, you do have a bit more perspective and understanding of the type of things that would be relevant to a financial advisor. So when, when you are presenting research, you have that lens with which to understand the type of things that they're actually looking for. Uh, because there is a lot of noise, there is a lot of detail you can get into as a, as an investment professional, but understanding what are the bits that actually are important to a financial advisor. And that for me has been vital in my role up until today.

Speaker A: You joined Graviton as head of invest in October 2022, what does your role involve and where are the main responsibilities of the investment team?

Speaker B: Yeah, so for me it's a funny thing. I feel like um, I'm just a go between a lot of the time. But if in effect um, what my role is, is really to connect those two worlds that I mentioned earlier. So a financial advisor when they appoint a DFM is really. They really try to appoint the DFM to the extent that they don't really want to deal with a lot of the uh, investment um, function. So be that dealing uh, with uh, asset managers. So often, um, what happens when advisors appoint DFMs, they don't really deal with the asset managers directly anymore. So it's being uh, the person that connects them to the asset managers, managing that relationship, they do want to retain that and then also plugging into the investment team. So I'm um, very much a go between um, the different providers that ultimately bring the DFM service proposition together. Because the investment team and dealing with a portfolio manager and investment professionals is certainly just one element of what a DFM really delivers, uh, from a servicing model perspective. So it's about bringing operational compliance, um, legal way appropriate, um, investment team. And then also the product providers themselves are dealing with the platforms, helping their advisors solve issues, um, with platforms, Mancos, etc. So that really does capture a lot of things that. So my days are quite varied which I, which I quite enjoy. Um, and very few days are exactly the same.

Speaker A: Graviton acquired a majority stake in Portfolio analytics earlier this year. Ah. While the two businesses said they would retain their identities and work together, what strategic opportunity did this deal create and how are you bringing the businesses together in practice?

Speaker B: Just a step back in terms of understanding I guess, portfolio analytics as business. So Portfolio analytics is a DFM that focuses exclusively on the independent financial advisor basis. They've been doing that for over 25 years and they've been incredibly successful. So we've always uh, admired the business. I think it's a great business. Um, but what we found in the financial advisor space, and this is um, a trend that we've picked up increasingly over the last few years, is that independent financial advisors really face a choice at the moment, particularly as regulations have increased, but also as they have um, gotten older over time, is that um, they either remain independent and they continue to pick up all of those um, regulatory uh, requirements or they look to join a network. And increasingly what we found is that independent financial advisors have looked to uh, financial advice networks, um, to sort of to either to cater for um for the um then just getting older and looking for a place to um, place to um sort of operate on and not take on that um compliance burden um but then also just for succession as well overall. So um, what inevitably what that does is that it puts pressure on businesses like Portfolio analytics who inevitably end up losing clients. Because usually what happens when a financial advisor joins a um a network uh that they tend to fire dfm um and so I think what um it does by aligning portfolio analytics with Graviton. Graviton of course has a Graviton wealth as part of the broader Graviton business. So Graviton has the DFM and the advice business. So what that does allow is that would portfolio analytics to align with a partner that can offer the scale um and also the balance sheet as well as the capability actually to capture these um uh these IFAs these independent advisors that that are looking for a network partner so that Portfolio analytics can retain the DFM appointment um even when the advisor decides to join a network ultimately. So from from their perspective that's certainly one um that would be attractive for them. And then from a Graviton perspective obviously having analytics um in the broader, in the broader business does um certainly uh widen the scope uh for Graviton Gaveiton in its initial years certainly did um look to the independent um market as a straight DFM similar to Portfolio Analytics. But as our advisors have evolved and as we've partnered differently with them we've primarily looked to grow the network space and then offer some DFM services to advisors through the Gavitan wealth channel and then continue to look after our uh advisors who've gone through a journey with us um from having their own cat one to actually having their own cat two and managing fund of funds alongside um us as well.

Speaker A: But the $1 million question is how will advisors and their clients see the benefits? What will you use to judge whether the partnership is succeeding?

Speaker B: Yeah, so ultimately I think for, for us is to give them something that they have needed. So from from a scale perspective sun so Graviton fits uh in obviously we sit within the Sunlam Investments uh business particularly in the Sunlam Investments multi manager business which is over uh 500 billion rand uh asset manager um so from a scale perspective, a back office perspective but also from a pricing perspective that offers something to portfolio analytics that um from a client benefit perspective they would certainly um see that from a um continuity perspective particularly as I mentioned on the independent advisors where they sort of have continuity in their advice practice they can retain the DFM and that ultimately um doesn't benefits investors in the sense that there's continuity in terms of the investment proposition um which we think has been working uh quite well up until this point anyway. So and and also just to go back to your previous question from a, an alignment perspective um what we found when speaking to Portfolio analytics is that there certainly is a lot of um alignment in terms of their own investment philosophy um and ours um and how that sort of will play out in terms of the solution. There's definitely we don't see a big sort of change and that's why we've been comfortable in the sense that Portfolio analytics has continued to operate um as is up until this point. Um but the one question I didn't answer from your previous uh question apologies is just in terms of the integration. So I mean up until this point we've continued to run things sort of as is um but over time we will certainly look to align um the businesses where where it makes sense um and then also looking for particularly on the back office investment perspective real sort um of ah slowly starting to roll those things out as well to the portfolio analytics client base which again I don't see that as particularly disruptive but certainly one way we are going to work alongside the business to ensure that there's a seamless transition as possible.

Speaker A: Let's get into the nitty gritty of the business. How would you describe Graviton's DFM proposition to an advisor deciding whether to outsource portfolio construction and management and which part of the investment process remain with Advisor and which part will sit with the dfm. M

Speaker B: is and again this is cliche but it is true that um this is really driven by what the advisor is looking for in a dfm. So the one positive, the one selling point from the Graviton DFM is that there is a fair amount of flexibility in the sense that. And I think we picked this, I picked this up um within the DFM space throughout my without my time in the in working in a DFM is that different advisors want to be more or less involved in the process. Um so I guess you. I'll answer your second point first in the. In the sense that um, depending on how much of the investment proposition they wanted to keep with them that will dictate how the relationship works. So um, for a lot of advisors they're happy to, to send in the report packs to buy into the solutions and not be as ends on but in in many cases the guys do want to be quite hands on. They want to meet managers, they want to have due diligence with, with the managers themselves and we facilitate that as well. So I think the, the real selling point from the GAVIT and DFM perspective is that we'll build it based on um what you're looking for as a financial advisor and we build a solution depending on what your, what your client base looks like, um, what is, what is the mix of assets that you have. Um we will build a solution largely dependent on that um and within the broader framework within the investment proposition and this again aligns um with the multi managers um sort of investment philosophy of solutions architecture is that we're able to build solutions depending on a variety of different briefs. So depending on what the brief is and really speaking with the advisor, working the journey with them uh and really getting to know their business properly, uh we're able to build a solution that really caters to what they're looking for. 1

Speaker A: How do you decide when to make a change to a portfolio? What evidence or conditions would prompt the team to replace a fund or adjust an allocation?

Speaker B: Yeah so there's obviously there's some immediate deal breakers so like if uh, if there's a massive um changes within the business and the whole investment case overall um becomes null and void um then it's definitely something that the team will look at immediately um in terms of changes. But uh when it comes to uh performance um again then then it becomes slightly more complex in the sense that um one will needs to understand where the underperformance really comes from. Assuming it's underperformance uh whether that aligns with our understanding of when a manager is supposed to outperform or underperform uh and if there is a disconnect there then then these things go under review. But certainly we not um a manager uh who would recommend chopping and changing portfolio. So what we find is that we don't, you don't have a lot of turnover within a very short period of time.

Speaker A: Imran, what is your approach to selecting and blending underlying managers? How do you assess whether fund has a role in a portfolio beyond its recent performance?

Speaker B: So our team um spends a lot of time understanding the nuances what within managers um beyond just looking at m, what the performance has been and which ones have done well and which ones have done poorly but really just to understand um what is the real um elements within the market uh or the anomalies in the market that the managers are trying to Extract. So again assuming in your question that you're looking at active managers um whereas maybe just to address the passive point is that we certainly do have a view that there is a place in portfolios uh for passive and for index funds. But when I'm just trying to understand an active manager it's really just trying to understand what the team refers to as style beta. So what I mean by that is really trying to understand what um anomalies uh like I mentioned earlier trying they're trying to extract within the markets but then also what is the style that they're likely to um display in terms of their return profile and in that way that will guide the team in terms of the managers who you should blend together because again ultimately diversification like the, like the saying goes the only free lunch in investments uh and really trying to blend managers together who are the best within their own um sort of discipline so to speak into if you want to call style dynamics of discipline and then also blend those together within a portfolio. And the guys um or the investment team they would use in addition to the qualitative oversight that one has with that uh taking into they would use a number of quantitative uh tools uh that the team have built internally to help trying to build the most efficient portfolio. Um so it's effectively trying to combine the qualitative insights that they derived through meeting with the managers and better understanding the numbers that come out and then using the the quantitative power of the, of the tools that they have at the disposal to build the most optimal portfolio. That's in a nutshell how they sort of look to build with using different elements and building blocks and then also trying to make the portfolio efficient based on on what the objective is on the overall portfolio.

Speaker A: Imran markets can reward different styles and asset classes at different times. How do you balance responding to changing conditions without with avoiding reactions to just short term noise?

Speaker B: Yeah so that's these are tough one. I mean I think as much as investment professionals and we've seen I've seen this across my career uh is that you definitely always try and you and you proclaim to to not be sucked into the emotions of it but that does, it certainly does impact um guys but again that's why it's important to retain keep each other honest keep um sort of the conversations sort of clear and cut and then using facts to to base your decisions um but certainly from a, from a choosing when to to change and trying to understand the different dynamics of the um of the different styles again from we have A general understanding of when certain styles should do well and when they shouldn't. Um, and if we understand our managers correctly we expect that to sort of play out in a, in a certain way. Um so I think from that perspective when we, when we, I try to understand managers and why they've done what they've done. Um, the overall uh, style impact on the market overall is certainly something that um, we do take into account and we measure the managers based on sort of how they've done relative to their style, um, beta so to speak as well.

Speaker A: What role does diversification play in your portfolio construction? How do you check whether portfolio is genuinely good diversified rather than simply holding a large number of funds?

Speaker B: Yeah, so there are certainly different, different ways in which to do that. Um looking at the performance profile obviously is one. Um, so you can look at the performance track record and um, sort of compare how the guys have done from a, from a volatile or variance perspective, a covariance perspective. Um but for us, I mean it's obviously as vital um to have managers that are, are diversified. Um, we try to understand the managers from a ah, qualitative perspective. Like I mentioned earlier in chatting, in speaking to managers you get a good understanding in terms of where their biases they really sort of sit. Uh, we also in most cases get instrument level um information from a lot of our managers which also helps us to assist where we can understand where there are big overlaps in terms of um, in terms of the holdings that they have as well. So I mean that is something we check.

Speaker A: How do you think about offshore exposure in a uh, South African investors or portfolio? Which client, which client needs or portfolio objectives guide that decision.

Speaker B: Depending on the mandate. We do have a view in terms of what level of offshore is appropriate for any particular type of mandate. So what we find is that obviously in the more aggressive mandates we do more offshore in those portfolios. Um, but when you go to the more conservative portfolios because of the currency volatility, ah, that gets introduced into the portfolio. Often on the more conservative portfolios we don't tend to maximize the offshore exposure. Um, but overall when it comes to a decision on, on whether you're going to hold more or less than you would on average over time a large part of that is determined by our understanding of what market forces are driving the different um components of that be that the currency and then also the valuation on global um, particularly on equities but also on the other asset classes as well. So bonds and property, um, so our market research team would get A give the investment team an understanding of what the valuations look like um, relative to South African markets. Um and then depending on what that view is it will also dictate um whether we tilt a little bit more, tilt a little bit less. Um but overall when we do the modeling on how much is appropriate for a long term portfolio um, it does ratchet up as you go up the risk spectrum.

Speaker A: Um Imran, what information do advisors receive about the portfolios and the decisions behind them and how important is communication when portfolio is going through a difficult period?

Speaker B: So we obviously have standard reporting um, so that includes um fun fact sheets um, that we send through every month. Um and we also have quarterly uh report packs uh, which includes a quarterly uh investment committee pack uh which details a bunch of things including um, market related things and also portfolio specific things. So looking at the underlying funds, which funds, uh, what they did, uh, and then digging in a little bit deeper into providing insights on that. So we do try to provide quite regular insights on things that we feel are um, um relevant and stuff that we've, we've encountered in the market um and we think it'll be relevant for financial advisors. So definitely sharing information is critical although there is a balance to that um because once you, once you flood advisors with information um, they eventually they, they miss the important bits and they, and you sort of, you don't want to spam them as well. So it's important to, to find the right balance in terms of sharing information. We also uh, because of the other nature of the, of our business is that we do have quite close um engagements with our advisors. Um so if they do have specific questions I deal with um, queries on a daily basis um, trying to understand underlying managers, what drove uh, what drove this, what drove that etc. Um so on top of the portfolio information obviously we provide market information on a weekly basis um through various um sort of mailing lists um or information that we send on to guys. So we try to keep them as informed about their portfolios, markets, what's driving their markets, whether that's politics, whether that's um, what's happening in the US etc. We do try as far as we can to cover their basis um when dealing with clients because ultimately what the DFM uh is essentially there to do as well is to make delivering an investment proposition easy for a financial advisor. And that's ultimately the aim of a DFM m, um regardless of your approach is really trying to make their lives easier uh, and make it easy to have an Investment position, investment proposition. As a financial advisor,

Speaker A: Imran, what do you see as one of the biggest opportunities for a DFM business to improve the experience and outcomes for advisors and their clients.

Speaker B: So you know at the moment what we've typically found, I mean again AI is, I mean wherever you see, you see discussions of artificial intelligence and how that impacts things. So while it does make financial, some parts of um, financial advisors lives sort of easier, we also find that it makes it difficult in the sense that um now this information asymmetry that existed 15, 20 years ago between the financial advisor and the investor and their client has certainly been whittled away. So I do think from a DFM perspective, uh, the challenges of financial advisors have certainly not gotten fewer uh, in the sense that now they have to explain themselves to a much broader extent. So I think the, the DFMs that are really going to be successful in this world um, are going to be ones that are able to facilitate that flow of information as seamlessly as possible with advisors. So that advisors really are um, empowered with the information that they need to understand what's happening and also in plug that into the advice. So it really, it's about connecting the advice component which again the financial advisor is the champion of. And that's really where they uh, their skill set really is understanding the investor and ensuring that they spend the appropriate advice. But then it's for us to come in as DFMs and then really provide um, the investment insights that they need in a seamless way that if they can see 10 clients in a day and they can answer all of those questions seamlessly without having to spend time themselves for an hour to try to figure out what's happening um, with every, um, with every client. So really it is about sort of doing that and finding ways within this AI world to integrate um, even those insights even further through tools and um, to using the technology uh, in order to make things even simpler because the environment is getting tougher at investors have more information, they have easier access um, to investment insights. M and the financial advisor needs to be equipped with the information to ensure what is appropriate, what is not for investors to really again uh, show their value and they really do have a lot of value to add um to investors.

Speaker A: As the final question for today's DFM discussion, Looking ahead Imran, what is one issue you think advisors and investment professionals should be paying closer attention to?

Speaker B: Yeah, I do think it's as investment professionals and I think this is for the asset manager, asset management space in general is that as More uh investors become sophisticated. I think ultimately as investment professionals at Siomas, it's a little bit harder to justify your existence in this world um where there is just so much information. I think we get questioned all the time in terms of value add and um, whether that's through the advisors or through investors as well who feel like um they can so we go it alone or, or they're getting advice through a ah range of different spaces. Be that through social media um uh through influences etc it's incredibly um. It's going to be incredibly challenging sort of way um sort of period going forward as this becomes um, sort of more mainstream and more and more uh investors particularly younger ones that are. You have these more DIY type investors um coming into the space as time um has gone on to really be able to appeal to those investors as well and show value um within the asset management space at large but also within a DFM space that there certainly is value and finding new ways to add value to the financial advisors world and for clients.

Speaker A: Well Imran, we're going to leave it there. Thank you very much for joining me and for what I think has been a really useful discussion about where DFM being is generally add value, how investment decisions are made behind the scene and importantly where advisors should continue asking difficult questions. To all our citywide South African listeners, thank you for tuning in to this episode of Money Markets and Masterminds with me editor Ruan Yoster and my producer Vera Loba De Silva from the citywire Studios team. If you enjoyed this episode, please don't forget to subscribe, leave a review and share it with your network. We are available on all major platforms such as Spotify, Apple Podcast and Iono FM M. All city wide South Africa podcasts and videos are also available on our website. So please go register and have a look at our wealth of multimedia content. And with that and until next time, bye bye.