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Sygnia performs despite ‘turbulent’ economic environment

Offshore expansion the next thing to watch.
Sygnia itself has set the bar high. Image: Shutterstock

Shares in listed fund manager Sygnia closed over 4% up on Tuesday (at R18 a share) after the group, founded by Magda Wierzycka, reported a strong performance for the financial year to end-September 2021.

Sygnia itself has set the bar high in growing into one of the largest asset managers in South Africa since its formation in 2006 and its listing on the JSE in 2015.

The group’s 2021 full-year performance highlights include:

  • Assets under management and administration increased by nearly 18% to R296.4 billion (2020: R251.8 billion).
  • Revenue increased 11.5% from R661 million to R737.2 million.
  • Profit after tax reached R240.9 million (up close to 17% compared to R206.1 million in the 2020 financial year).
  • Headline earnings per share of 170.7 cents (2020: 146.4 cents), up 16.6%.

The dividend was increased to R1.35 per share, following the R1.10 paid in the previous year.

Turbulent backdrop

Management says this was achieved during another challenging and economically turbulent environment for cyclical businesses such as Sygnia.

“During the period, the FTSE/JSE All Share Index returned 23.2%, the JSE All Bond Composite Index 12.5% and the MSCI World Index, in SA rands, 16.2%.

Read: Sygnia, Wierzycka and several ‘small related party transactions’

“The growth [in assets under management] has taken place in an environment where the institutional savings market is shrinking by virtue of almost negligible economic growth, corporate closures and retrenchments in South Africa,” noted management.

On the operations side, it is noteworthy that the growth in assets under management was boosted by retail investors, rather than the winning of mandates from institutions.

Sygnia CEO David Hufton notes that the “superior” long term performance of Sygnia’s investment funds has been a strong factor behind this growth in retail fund flow, as well as the launch of several new funds.

“The Sygnia-managed range of funds continue to rank in the top quartile of performance surveys across most risk profiles over the medium- to long-term. This performance is a mixture of low cost strategies and a strong focus on macroeconomic trends, which drive active asset allocation decisions.

“Sygnia’s focus on low-cost investment and savings products and service provision has meant that, in contrast to our competitors, we have experienced little pressure on management fees,” says Hufton.

Read: The top-performing global equity funds available in SA

Sygnia also mentions that past initiatives, such as the launch of Sygnia Umbrella Retirement Funds in 2016 and the acquisition of a passive asset management business from Deutsche Bank in 2017 (renamed Sygnia Itrix), are starting to contribute materially to results.

The retirement umbrella fund business is now the sixth largest umbrella fund offering in SA, while Sygnia Itrix is the second largest provider of JSE-listed exchange traded funds (ETFs) and the largest SA company providing international ETFs to the local market.

Offshore expansion

The company’s offshore expansion will be worth watching. Hufton notes that the international expansion is not expected to contribute materially to the results for the foreseeable future, but is regarded as an exciting opportunity to diversify revenue in future years.

Sygnia has recently launched a number of funds registered in Ireland which will be marketed to SA clients with existing offshore investments, as well as through international investment platforms.

Management also notes that the trend towards passive investment strategies is on the rise in SA.

“Sygnia is well positioned to take advantage of a growing scepticism among investors about the more expensive alternative of active management, especially in a low-return environment,” says Hufton in his commentary to the results.

“Thematic investing is also gaining in popularity, and our niche funds continue to enjoy good inflows.”

Market conditions

It is worthwhile taking note of the experts’ views of investment markets.

Sygnia believes that while 2020 has seen a remarkable recovery in markets from the Covid-19-induced recession, it has also brought with it the shadow of rising inflation for the first time since the global financial crisis of 2008.

“This fear of rising prices has also led to the realisation that central banks around the globe will need to normalise monetary policy and end the great liquidity experiment, which has greatly benefited markets like South Africa,” it notes.

“The rand has strengthened close to 10% over the past year, but as a nation we still have a large fiscal imbalance to contend with. Positive terms of trade, notably from high commodity prices, also provided tailwinds for the local currency, but supply chain bottlenecks and the energy crisis will soon turn these to headwinds, and the fiscus will have to be very disciplined to avoid a debt trap.

“Within our managed portfolios, we are still positioned for a low-growth, low-return environment framework, with the world experiencing financial repression as the role of governments and central banks intensifies,” according to Sygnia.

China

The team at Sygnia also made interesting remarks about China.

The Chinese government is aggressively pursuing its policy of “common prosperity”, which turned a spotlight on the unchecked growth of its many global technology companies.

“This had a knock-on effect domestically with the Naspers/Prosus group being particularly hard hit due to their large holding in Chinese internet giant Tencent, which remains on the right side of government policy and a recovery is likely for this stock,” says management.

“We anticipate that China, and the global economy, will be affected by three issues in the coming years. Firstly, despite widespread fears of increased government oversight, the Chinese government is not intent on outright crippling their technology companies and their top regulators have reassured investors that stricter rules are not aimed at stifling the private sector.

“Secondly, while the default of property development company Evergrande has raised concerns over the scope of China’s housing slowdown and how sustained the broader contagion will be, it is expected that Beijing will continue to balance common prosperity with economic stability. Although it is likely that Evergrande shareholders and bondholders will be sacrificed, the real estate sector and the Chinese economy will survive.

“Thirdly, China’s monetary policy is becoming more stimulative with the People’s Bank of China cutting bank reserve requirements in July. In September, the State Council announced an additional RMB 300 billion in credit support for small and mid-sized enterprises,” notes Sygnia.

Recovered

Like most shares, Sygnia recovered sharply from its low of R7.50 during the JSE’s Covid-19 infection in March 2020.

Shareholders seemed happy with the results on Tuesday and the share, although still below its recent high of R21, added 80 cents to close at R18.

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