Serving a new kind of investor

Given the lower return environment, investors are becoming far more fee sensitive and don’t want to pay as much as before if there’s little prospect of outperforming the market. With the focus on short term performance, many active managers hug their benchmarks to avoid underperforming their peers, which makes it difficult to generate alpha and, in turn, justify their fees.

The ability to evolve is the overarching challenge facing asset managers, says David Hufton, the recently appointed joint CEO of Sygnia. The successful asset managers of the future must respond to the growing scrutiny of fees and everchanging investor needs, in addition to embracing technology to transform their business from improving the customer experience to enhancing the investment process.

Hufton says the downward pressure on fees and the rise of passive investing are two major challenges for the asset management industry. Given the lower return environment, investors are becoming far more fee sensitive and don’t want to pay as much as before if there’s little prospect of outperforming the market. With the focus on short term performance, many active managers hug their benchmarks to avoid underperforming their peers, which makes it difficult to generate alpha and, in turn, justify their fees.

The belief that active managers can manage a market collapse better than their passive counterparts was again questioned this year, he says. With few exceptions, active managers failed to better protect their clients through the steep selloff when the Covid19 pandemic took hold of markets. While passive investing makes up about half of the US investment industry and is a rising force in other developed markets, its market share remains low in SA. “But that’s changing as more local investors switch to lower cost index tracking options and exchange traded funds, or marry the best aspects of passive and active strategies,” he says.

“That trend is also encouraged at an institutional level by the so called ‘default regulations’ that require retirement fund boards of trustees to consider passive investment strategies for their members’ default investment options. “And improved and standardised industrywide fee disclosures are making investors more aware of the impact of fees on their investment outcomes.” The competitive advantage of asset managers, says Hufton, will be weakened if they don’t reinvent their business models and broaden their product mix.

“A major challenge facing today’s asset managers is the shift by employers from sponsoring their own retirement fund to participating in a commercial umbrella fund, which tends to favour inhouse investment offerings of the umbrella fund sponsor.” Sygnia responded to this challenge four years ago with the launch of the Sygnia Umbrella Retirement Fund (Surf) , the lowest cost umbrella offering in SA, offering passive only and active passive blended investment options. Hufton, an actuary by training, joined Sygnia in 2016 with the aim of establishing Surf. “It was a huge challenge to enter a well established industry, but having a blank slate provided some advantages. Unhindered by out of date administration systems and legacy super profits meant we could launch a revolutionary fund at the lowest cost,” he says. “Our introduction of a single all in fee as opposed to the many layers of fees charged by legacy firms offers much needed simplicity and transparency.”

Asset managers, says Hufton, need to consider a more socially conscious generation of investors. “Asset managers will need to offer more choices and respond to the growing demand and regulatory push for sustainable investing focused on addressing climate related and other environmental and societal challenges,” he says. This is particularly important in a stalled economy characterised by relentless competition for the same investor capital, says Hufton.

In the past 12 months Sygnia has launched two environmental, social and governance ESG themed funds. The Sygnia Oxford Sciences Innovation Fund offers investors access to the commercialisation of intellectual property at the University of Oxford in the fields of biosciences, health care and clean energy.

The Sygnia Health Innovation Global Equity Fund invests in opportunities to reinvent healthcare provision, investing primarily in listed global healthcare companies that pass an ESG screening process. Hufton was appointed joint CEO of Sygnia, alongside founder Magda Wierzycka, in early 2020. Conceding that the joint CEO model may not be traditional, he says their complementary skill sets offer increased scope and capacity for management and leadership. “We have clearly defined roles which allow us to be individually decisive, but we know when to consult each other. It’s a model we are confident will continue to work well,” says Hufton. Having spent more than 20 years at Alexander Forbes before joining Sygnia, Hufton says working in a smaller company that is agile enough to execute and implement ideas fast has been liberating. His mission is to create low cost and accessible services and products that meet the needs of “ordinary savers”. “Our ultimate aim is to turn the ordinary saver into an extraordinary investor, no matter how much or how little they have to work with,” says Hufton.

Published by: Financial Mail

Date: 22 October 2020

Writer: Lynette Dicey (for Financial Mail)