A R325m deal will boost Sygnia's assets and close a big gap in the asset manager's suite of products.
A R325m deal will boost Sygnia's assets and close a big gap in the asset manager's suite of products.
Magda Wierzycka, CEO of Sygnia Asset Management, wants to disrupt the world of exchange traded funds (ETFs) — a world she has been a staunch critic of for years.
"The ETF industry hated me," Wierzycka admits. It will be even more miffed after Sygnia announced last week that it had bought Deutsche Bank's JSE-listed db X-tracker (DBX) ETFs for R325m, about 10 times DBX's earnings.
Overnight, this adds R11.3bn to Sygnia's assets under management.
At September 2016, Sygnia had 16.9bn in its index tracking funds and R11.9bn in its unit trust funds, so the purchase is a big deal, giving Sygnia considerable clout in the ETF arena.
But what has piqued the interest of her rivals is Wierzycka's Uturn on ETFs. Asked about this, she insists she was always a detractor of the cost of ETFs — not ETFs themselves. "The actual management fees in an ETF are modest, it's the layers of cost on top of that," she says. These include the trading costs and stockbroking fees, which cause costs to rise.
"Something that is sold as a cheap index-tracking product for an average investor becomes as expensive as buying an actively managed unit trust. Index tracking is only sensible if it's low-cost," she says.
Still, her criticism ruffled plenty of feathers. Nerina Visser, ETF strategist and adviser at etfSA, says Wierzycka has, in the past, compared the most expensive options for accessing ETFs and then presented this as the status quo.
Investing in ETFs through an investment plan — such as those offered by etfSA and Satrix, where brokerage and trading fees are considerably reduced — is far more cost effective, she says.
"On average, ETFs are less expensive than unit trusts, but it is possible, particularly as a retail investor, to end up paying too much for ETFs. Investment plans that do the trading on behalf of investors avoid this risk," Visser says.
Wierzycka says Sygnia plans to slash many of the costs involved in the DBX ETFs, but she is reluctant to commit to precise details of cost reductions just yet.
The bottom line appears to be that the purchase of DBX was done to plug a hole in Sygnia's product suite, as it was losing business from the investing public by not offering ETFs.
It gives Sygnia some additional firepower too. For one thing, it will give the company the ability to directly manage offshore index-tracking funds, something it was doing predominantly through third-party asset managers.
What's also compelling, says Wierzycka, is that ETFs that contain offshore assets aren't capped, which means retail investors can get large exposure to international products without restrictions. "If you invest in an offshore unit trust, the unit trust.company has a limit of 35% of assets that can be externalised," she explains.
Wierzycka says the deal was planned for close to 18 months. But it was given a boost by former finance minister Pravin Gordhan's budget in February, which made it possible for local unit trust companies to own ETFs that hold foreign assets.
The change in the rules means SA unit trust companies are now allowed to list ETFs with foreign assets on the local exchange.
Sygnia had motivated for this change and resubmitted its acquisition application in terms of the simpler structure, Wierzycka says.
It's a boon for the asset manager, whose share price has struggled to rise much above the R15.30 at which it first began to trade on the JSE, back in October 2015.
Anthony Clark, an analyst at Vunani Securities, believes Sygnia is a "hold" and has welcomed the deal, saying it adds a sustainable earnings stream to the business.
Clark expects Sygnia's share price to hit R20 — above its current level of R14.98.
"The transaction also brings to Sygnia a platform of 6,000 investors who have monthly savings mechanisms with DBX. Cross-selling opportunities can be leveraged from this new base," Clark writes in a note.
It will also boost Sygnia's profit. For the year to September, Sygnia posted after-tax profit of R72.3m, while DBX's after-tax profit for its last year was R38m.
DBX has five offshore equity ETFs, including the MSCI World and Euro Stoxx 50.
Sygnia will soon introduce a global bond index and a global listed property index, says Wierzycka. It will change its "fourth industrial revolution" unit trust into an ETF, giving investors access to global tech.companies."
"We have quite big plans for this business," she says. Sygnia also plans to launch ETFs under its skeleton range of funds and in its umbrella fund.
To make this deal happen, Sygnia is planning to issue shares to raise R320m. Clark recommends investors follow their rights, and take up the shares.
"Given Sygnia's current p:e of 26 times its earnings, the DBX acquisition, even after the rights issue dilution, will be accretive and an elegant augmentation to Sygnia's suite of products," Clark says.
Visser, however, is sceptical over whether the acquisition will be earnings-accretive for Sygnia shareholders — particularly considering the rights issue and the fact that Wierzycka plans to reduce the costs of the DBX ETFs, which will limit profitability.