SIMON BROWN: I’m chatting now with Sygnia joint CEO David Hufton. The company had results to year-end September. Assets under management up 5.6% at just under R252 billion. Revenue up just over 30%. Diluted headline earnings up 64.6% and a dividend of around R1.10 versus 60 cents last year.
David, good morning. I appreciate the time. I’m going to quickly go back to that March collapse and selloff. You’ve obviously got a lot of pension funds and the like, but you’ve also got a fair number of private clients on your platform. Did you see client panic? A lot of anecdotal evidence of people I’ve spoken to is that the investors, particularly those in the passive instruments, did the right thing. They just sat through the crash and ignored it, which is long-term strategy 101.
DAVID HUFTON: Good morning, Simon. You’re absolutely right. Most of our investors, both institutional and in the retail space, certainly stood strong through the February-March decline when the markets plummeted as the pandemic took hold. As you know, the markets rebounded in the following months and that strategy paid off for our investors.
SIMON BROWN: That’s actually an important point. The market came back, so the private clients were rewarded. It always does come back. I always say, every crash I’ve lived through, the market has recovered – but sometimes it’s scary while it’s crashing.
Overall, you’re obviously very big in the passive space, the low-cost space. And they are both key sort of pillars of Sygnia. In an environment where there is pressure on returns and therefore pressure on those fees, Sygnia is perfectly placed. You’re already low-fee. You don’t have to sort of see where you can cut them. Are you seeing the commensurate inflows from that positioning?
DAVID HUFTON: Oh, we absolutely are, and hearing a lot more from the larger asset managers about the pressure that they are being placed under in terms of feeds, especially in this low-return environment. So, as a low-cost provider, we are well-positioned as fees come under pressure. Investors across the board, both institutional and retail, are certainly looking for better deals.
And I think what they are appreciating is that passive investing is making more sense. It’s certainly on the rise in South Africa. If you think about how common it is in the developed markets in South Africa, its market share is perhaps 4 or 5% across the board, but investors are starting to appreciate that index tracking has delivered a consistently better performance than active managers over time. That’s no longer a myth nor an opinion. It’s an evidence-based fact.
SIMON BROWN: You stress that. No longer a myth or an opinion, it’s actually real. That 4 or 5% – that’s not a bad number. We’ve just celebrated, two weeks ago, the 20th anniversary of our first ETF. Truthfully, that 4 or 5% is well below what we’ve seen – certainly the data I’ve seen coming out of the US. There is a huge amount of space here for more growth for the passive industry locally.
DAVID HUFTON: Absolutely. I think that in the developed markets, and you mentioned the US, the numbers are about 50% passive in the equity space in the US. So for a company like Sygnia – which is a well-known passive provider, but much more – we’re well-positioned with a below-market share in SA. And it is becoming far more popular, as we say. So for a company that’s looking for organic growth, we couldn’t be in a better position with that low market share.
SIMON BROWN: I want to come to that growth in a second. But, before we do, last year in 2019 some regulations arrived that require all retirement funds to consider passive investment, to look at those options in the design of their investment strategies and the like. Are we seeing that? Obviously the legislation says they need to look. I remember chatting with trustees sort of five, 10 years ago. And truthfully the knowledge around passive was, with respect to the industry, about zero. Are we seeing those trustees at least pick up the interest, pick up the knowledge, and perhaps even start to dip their toes into the passive space?
DAVID HUFTON: Simon, we are starting to see it. Those regulations came into place more than a year ago. But admittedly trustees, just by the very nature of the way they manage funds, and they meet every quarter, do suffer from a level of inertia to some degree. So, as much as the passive interest had not picked up a year ago, we are seeing far more active requests for pitches from ourselves. We are not being successful in entering the retirement fund space from the passive perspective. And, just to be clear, as much as you say they should be looking at passive, the regulations in fact say that the regulations compel trustees to look at passive as well as low-cost propositions.
SIMON BROWN: To quickly go back to those costs, I remember my first unit trust. I think I was paying 5% a year, before performance fees. It never performed, so there was no performance fee. But back then – this was the nineties – there was high inflation. The expectation for return was probably 15%, and you paid five. It was too much, but you at least got 10% at the end of the day. These days in a lower-return environment and a lower-inflation environment, if your return is only 5%, you simply can’t be paying that 5%. You’ve got to be paying sub-1%. That opportunity does exist out there, and is significant for that investor’s return.
Correct. In a low-return environment, consumers are far more cost-sensitive nowadays, and it’s something else that is helping our greater disclosure.
So CISA last year and this year instructed their members to release standardised and comprehensive cost disclosures to employers that are participating in umbrella funds. And, as of March next year, umbrella funds need to produce cost disclosures at a member level, which compares, on a standardised basis, the cost they’re incurring in those funds that will allow members to compare the costs across other retail products.
That improved awareness should hopefully put pressure on trustees and employers to re-assess the costs that their employees and their members are incurring.
SIMON BROWN: That’s a great point. I knew my unit trust was 5% because I was the nerd who went in and had to truthfully do a lot of digging to find it out. These days it’s a requirement that it’s front and centre, and suddenly when you turn that into a value you realise someone made a lot of money here, and it wasn’t necessarily me.
And that is the trend. We’re seeing it in South Africa. We’ve mentioned it. Globally costs are under pressure. And it comes to the point I made earlier – you are already in that space. But you mentioned that Sygnia is more than that. You’ve got your trading income, which is running at about a quarter of your overall income. What is made up in that trading? Where’s that coming from, because I saw it six months ago in your results and I’ll be honest, it surprised me. It held up. In fact, it did significantly well in the full year.
DAVID HUFTON: We are more than just an asset manager, a well-known …… and a leading multi-manager. But we are a diversified financial services group. And over the years we’ve looked at the entire value chain of the investment process, and we’ve tried to vertically integrate where it was possible.
So, for example, we’ve introduced stockbroking services, foreign-exchange transacting services over the years, which we use in-house for the management of our own products. We’re able to provide those services at far lower a cost than we would have otherwise incurred in the market, which of course ultimately benefits our investors. But importantly it allows us to capture that revenue, and that has helped increase our overall margins.
We have added another service too, and that is scrip lending, where we lend our stock to borrowers, and the borrowers pay us a fee for that scrip. That fee is something we share with our clients, which in turn enhances their performance.
Our foreign exchange and our scrip-lending services came online about two years ago, and they’ve really only now come in at full scale. Hence that’s the change you are recognising in our year-on-year results – an increased impact from trading income.
SIMON BROWN: I get that. That was part of the philosophy behind the Itrix acquisition – bring it in-house and you can push the fees down and you can actually make some of that fee for your own shareholders and reduce it for your investors.
Sygnia CEO David Hufton, I really appreciate your time this morning.