Edition: March / May 2017


Poles apart

The offer of a 0,4% management fee is enticing. Before biting, retirement funds should examine it carefully in the context of other fees and rival contentions.

By an extensive and expensive advertising campaign, which highlights the offer of its funds at an all-in fee of 0,4%, Sygnia has sought the image of being the “disruptor” in asset management. But this 0,4% claim is not to go unquestioned, without reference to the various Sygnia funds’ fact sheets, and certainly isn’t left unchallenged in a vigorously competitive industry.

Rather mischievously, on its website Sygnia produces an illustrative ‘Compare us’ table. It shows the net replacement ratios of two Sygnia umbrella retirement funds (SURFs) against five other umbrella funds. None are identified, so they cannot counter the claims. Neither can it be known whether like is being compared to like in the sense of relative sizes (the larger the fund, the greater the potential for reduced costs) and strategies (which impact on performance).

In a general comment, John Gilchrist of Old Mutual Investment Group points to “incremental changes” already disrupting the industry and that he expects to accelerate: increased use of indexation (passive investing); factor investing (smart beta); responsible investing (for compliance with codes and regulation), and management of risk (going beyond the simple diversification of a balanced fund).

For its part, Sanlam Umbrella Solutions maintains that the standard of effective annual costs (EAC) – introduced by ASISA for retail products (TT April-June ’16) – should similarly be applied to umbrella funds. “An industry-agreed standard method for comparing charges on investment-savings products would allow employers to make better, more informed decisions,” urges chief executive Irion Terblanche.

Specifically on the SURFs, Sygnia’s 0,4% claim is confused by its own fact sheets. For example, the fact sheet for the Sygnia Skeleton 70 fund as at last October shows annual management fees at 0,4% but, inclusive of other fees, a total expense ratio of 1,09%. When transaction costs of 0,17% are added, the total investment charge is 1,26%.

There appears to be less disclosure of fees in the same fund’s fact sheet as at last December. It shows only management fees at 0,39% and says that performance fees are “charged by some appointed managers”. Nothing more.

“Why does Sygnia charge a performance fee in this fund when it is marketed as a passive fund?” inquires Steven Nathan of 10X Investments. “And where does Sygnia disclose the fees it earns on its own hedge funds?”

Asked which funds are offered to clients at a 0,4% total fee, John Anderson of Sygnia explains:

All of the Sygnia unit trusts (specialist index-tracking and risk-profiled global balanced funds) offered to retail clients charge an annual Sygnia management fee of 0,4% including vat. Importantly, all our savings wrappers (retirement annuities, preservation funds and living annuities), where the funds are invested in Sygnia portfolios, are offered at nil administration fee.

Where 0,4% is not the total, what additional fees are added and to what extent can these additions affect the total fee?

Hence you can invest in an RA and a Sygnia Skeleton Balanced 70 unit trust, as an example, at a total management fee of 0,4% pa.

Where 0,4% is not the total, what additional fees are added and to what extent can these additions affect the total fee?

The 0,4% is the management charge levied by Sygnia for the products mentioned. The recent ASISA disclosure standard, applicable to all retail savings products, has mandated the disclosure of all the costs (e.g. administration, custody) that may apply. They include transaction costs incurred in the normal operation of unit trusts. No performance fees are paid on any of our index-tracker funds.

Which Skeleton fund is offered on the SURF? Is it the Skeleton 70 fund or the Skeleton 70 Balanced fund?

SURF clients have always had the option of investing in the institutional versions (with institutional fees) of either the Skeleton 70 fund (unitised life) or the Skeleton 70 Balanced fund (unit trust). With effect from January, the institutional versions of Skeleton are only provided in SURF on a unitised life basis (via Sygnia Life). SURF clients can choose either the Skeleton 70 unitised life fund excluding hedge funds, or the Skeleton 70 unitised life fund including hedge funds.

The choice should be based on comparing the benefits of including hedge funds (which, over time, reduce volatility without compromising the returns after taking all costs into account), and in doing so accepting that overall costs are higher (compared to a desire to reduce costs to a minimum but accepting that with this option the volatility of the portfolio increases by excluding hedge funds from the asset allocation).

The default for SURF clients is the Skeleton 70 without hedge funds. However, clients can select the version including hedge funds after understanding the overall cost implications. They can discuss the pros and cons with us.

Indeed they should, and not only with Sygnia, for the sake of valid comparison where cost needn’t be the sole determinant. Trustees of retirement funds have a broader range of options available from service providers than they could have imagined even a year ago.