When people talk about the market going up or down, what they are talking about is the market index. This is a summary of the market that gives an overview of its value.
In South Africa, the most well known index is the All Share, or ALSI, which covers the overall market. People also talk about the Top 40, which looks at only the biggest shares.
Some of the major international indices are the S&P 500 in the USA, the FTSE 100 in the UK, and the Nikkei 225 in Japan. These guide investors as to how these markets are performing.
All of these indices are weighted according to company size. In other words, the largest companies will make up the biggest percentage of the index, while the smallest companies will be only a fraction.
When you invest in an index-tracking fund, you are buying a basket of shares that tries to match the performance of an index as closely as possible. These are also known as 'passively-managed' funds because there is no fund manager making active decisions about which stocks to buy or sell. The fund simply tries to mirror the index.
This makes these funds very cost-effective, as there is no need to employ highly-paid analysts and portfolio managers. Trading costs are also kept low because index trackers only have to buy or sell shares when the index changes.
The other benefit of passive funds is that investors don't have to worry about whether the manager they have chosen will perform well or not. Whatever happens, they will always get the market return.
All active managers aim to beat some sort of benchmark. Usually this is a market index.
The reality, however, is that there is no guarantee that any funds will actually achieve this. In fact, an annual study conducted by S&P Dow Jones shows that, across the world, a majority of active managers consistently under-perform the broad market index.
There are therefore two key reasons for investing in passive funds. The first is that it is extremely difficult to find the active manager who will beat the index on a consistent basis. That's not to say that it is impossible, but for the average investor faced with hundreds of options, it's hard to even know where to start.
The second is that beating the index becomes even more difficult to do after fees are taken into account. How much you pay is one of the few things that you can control as an investor, and it’s self-evident that higher fees will erode returns over time.
In short, if you are not a professional investor, index tracking offers a good, cost-effective default solution. Warren Buffet, who is widely recognised as one of the world's greatest investors, explained that if he passes away before his wife the instructions he is leaving for his money are simple (Berkshire Hathaway Newsletter, 2015):
"My advice to the trustee couldn't be more simple: put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the long-term results from this policy will be superior to those attained by most investors, whether pension funds, institutions or individuals, who employ high-fee managers.”
We are pioneers in the field of index tracking in South Africa. We believe South Africans should be able to access excellent investments at the most competitive prices.
A passive strategy is cost-effective to implement because we are only trying to copy the index. We do not have to employ analysts and portfolio managers to decide when to buy or sell shares, and yet we can deliver consistent performance that compares well against our actively-managed competitors.
One of our aims is to be the biggest index-tracking asset manager in South Africa, and to achieve that we have to offer the best value proposition to our clients. That is why we offer a total fee of 0.4% on our skeleton products, which is the lowest charge in South Africa and comparable to international standards.
We've also bundled our retirement annuity and asset management offerings together into one product, with one fee. We do not see these as separate products, as many of our competitors do, and so we can offer a single all-in price.
Our growth has also been based on industry-leading technology which allows us to automate a lot of what we do. That means we can offer clients a service that is efficient, but also cost-effective. We also don't outsource any of our services, and that allows us to keep costs down.
The 0.4% fee on our own products is not the only cost-saving we offer investors. Clients can access other major asset management companies through our platform, at the lowest management fees available. We also don't accept any rebates for listing unit trusts on our platform, which means that all discounts are passed on to investors.
Typically, we do not charge you anything to move your assets onto our platform. Sygnia does not charge:
What you pay depends on which funds you select. If you invest in Sygnia funds, we do not charge you any administration fees. You only pay the fund management charge.
All other funds will attract an annual administration fee, which we charge on a sliding scale:
A fee of 0.50% will be paid on the first R2 million of the investment amount in other funds. A fee of 0.20% will apply to the balance of the investment in other funds that exceeds R2 million. The annual percentage excludes VAT.
These fees will vary depending on which fund manager you select. For full details, refer to the summary of funds.
Advice fees are negotiable with your financial advisor within the following limits:
Unit trusts, which are also known as mutual funds in other parts of the world, allow many different investors to pool their money together and have it managed as one portfolio.
The way this works is that all unit trusts are split into equal fractions called units. Each unit represents a part interest in the greater fund. When you invest in a unit trust, you buy a certain number of units, each of which has a rand value.
All the returns in the fund are shared equally between the units. Their price will therefore go up or down as the overall value of the portfolio changes. These prices are calculated daily so that investors can always see what is happening to their money.
Unit trusts in South Africa are regulated by the Collective Investment Schemes Control Act, 2002 (CISCA). This law sets out how funds must be managed, and ensures that investors have certain protections.
Many funds in South Africa also comply with Regulation 28 of the Pension Funds Act, 1956. This sets out rules for funds used in retirement funding products, such as retirement annuities and preservation funds, and protects investors from being exposed to too much risk.
A unitised life fund is very similar to a unit trust, but it may only be used in certain products. It also allows investors to pool their assets into a single portfolio managed by a professional manager that provides daily unit prices. Most unitised life funds will comply with Regulation 28.
Traditionally, unitised life funds were only used by institutional clients such as retirement funds, while unit trusts were available to individual investors. However, there is no reason why individual investors should be restricted to one or the other.
As unitised life funds are mostly aimed at bigger clients, they may be able to offer lower management fees. With our products, other charges like audit fees, insurance and other operating costs are also covered by Sygnia Life. In a unit trust, however, these costs are carried by investors.
Unitised life funds are also not governed by CISCA. This means that they can offer more varied investment strategies that give investors better diversification and more attractive returns.
Our Sygnia unitised life funds can be used within these products:
It is however important to note that unitised life funds are not suitable for investors who might need instant access to their savings. This is because to invest in one of these funds you have to invest in a Sygnia Life life policy, with a minimum term of five years and limited early withdrawals.
The acronym TER stands for total expense ratio. It is designed to give unit trust investors a sense of what their investment is costing them every year as a percentage of how much money they have in the fund.
It takes into account the management fee, performance fees, audit fees, insurance, administration fees and VAT. These are all deducted from the unit price.
For unitised life funds, only the management fee and performance fees are paid by the investor. All other costs are covered by Sygnia Life. The TER on the fund is therefore less relevant, but Sygnia still calculates this quarterly to assist our investors.
Recently the Association for Savings and Investment South Africa (ASISA) also introduced a new cost measure called the estimated annual cost (EAC). This is designed to give investors in products like retirement annuities a clear overall picture of everything they are paying. It takes into account the platform administration fee, all investment management charges, advice costs and anything else that might affect the investor, such as penalties or bonus payments. At Sygnia we do not have any of these other charges, so the EAC will only ever include the platform administration fee, all investment management charges and advice costs.
If you are investing directly into unit trusts or the Sygnia living annuity, there are no restrictions on where you can invest. You could place 100% of your money in international funds.
However, investing in retirement annuities or preservation funds have to comply with Regulation 28 of the Pension Funds Act, 1956. This places certain limits on what a fund can invest in, such as:
In one of these products, you could therefore hold no more than one quarter of your money in international funds.
Sygnia monitors your personal investments on a monthly basis to ensure that your portfolio stays within these limits. If your portfolio moves beyond these limits you have a year to allow it to come back in line, if not, you may be forced to make changes to your portfolio.
If you invest in one of Sygnia's Signature or Skeleton funds that are Regulation 28 compliant, you will automatically have an allocation to international assets, and we will ensure that the portfolio stays within the necessary limits.