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Cluster Report 2018: Sanlam Investment Group

About SIG

SIG is one of South Africa’s largest investment management companies. We offer a comprehensive range of local and offshore investment products to end-investors, financial planners and institutions. Our investment options include passively and actively managed unit trusts, hedge funds and segregated and pooled retirement funds.

During 2018, the cluster’s organisational structure was adjusted to provide more clarity and create synergy. This included the consolidation and optimisation of the businesses that focus on managing the Sanlam Group’s assets. Sanlam Investments became Sanlam Investment Group (SIG), with the following sub-clusters:

  • The Sanlam Investments third-party asset manager;
  • Sanlam Specialised Finance (SanFin), which is responsible for managing the Sanlam Group’s assets and includes the former Sanlam Capital Markets business;
  • Sanlam Private Wealth; and
  • International.

SIG has a leading position in private wealth management in South Africa. It also pioneered index-tracking investment capabilities in South Africa with Satrix since 2000. Satrix launched Exchange Traded Funds (ETFs) in South Africa with its flagship Satrix Top 40 ETF. Since then we have launched a number of new and innovative index-tracking products to meet client needs.

SIG contributed 13% to the Group net result from financial services and 14% to GEV.

Key Facts and Figures

Net result from financial services
 
 

R1 152 million (2017: R1 227 million)

Contribution to Group net result from financial services
 

13% (2017: 14%)

Invested in empowerment financing
 
 

R14,8 billion in South Africa

Invested in renewable energy and climate-related funds

R7,9 billion

Number of employees
 
 

1 483 (2017: 1 057)

Employment Equity indicator
 

6,01 out of 12 as defined on the FSC

Key Strengths

  • SIG’s longevity and innovation: We have been around for almost a century and have always successfully adapted to our investors’ needs.
  • People, teamwork and values: Our employees are driven by passion and actively strive to be transparent and innovative.
  • A culture of diversity and commitment to growing our own timber: At SIG, transformation is imperative, and our internal programmes help develop tomorrow’s black investment professionals and business leaders.
  • Our robust, tested and proven pragmatic investment process and philosophy: Our performance history highlights the success we have achieved for our clients by committing to our investment philosophy.

SIG Values

  • Strength in collaboration
  • Value experience and continuous learning
  • Passionate in everything we do
  • Candid and transparent
  • Embrace diversity and change
  • Entrepreneurial in our approach

Key Factors Impacting on Growth Potential

  • Fee pressure, especially in an RDR environment
  • Muted investment market performance
  • Investor confidence
  • Weak economic growth in South Africa
  • Demand for non-traditional asset classes
  • Importance of index tracking as part of core solution growth

We nurture and grow our clients’ wealth while making a meaningful contribution to the transformation, growth and development of our economy and society.

Strategic Intent: Growing Third-Party Market Share

Sanlam Investment Group is defending its leading position in private wealth while building on the success in attracting retail fund flows. The cluster focuses on growing corporate and third-party fund flows, where it does not have its fair market share. Improved cost efficiency is a priority. Transforming the employee profile to reflect South African and client demographics is a specific focus area, and supports the corporate and third-party growth initiatives, with specific emphasis on portfolio management. Digital innovation in the areas of product development, client experience and value proposition, and intermediary service levels are key drivers in support of these initiatives. The proposed BBBEE transactions will result in the third-party asset manager becoming black owned, which will position it well to attract new institutional mandates.

As value investors, we make use of the opportunities created when prices differ from their fair value.

Our Investment Philosophy

We believe that financial markets are inefficient because the market participants are driven by emotions. These emotions cause asset prices to move away from their fair values, which creates investment opportunities for patient investors. Also, as various market participants have different investment time frames and liquidity requirements, assets can become mispriced over the short term. Generally, we invest in assets that are trading below our fair value estimate and disinvest from assets that are trading above our fair value estimate. We use a fair value framework based on the assumption that assets revert to their long-term average real returns.

All our investment decisions are rooted in this philosophy. What this means in practice is that our team of analysts conducts in-depth research to gain insights into what an asset is truly worth, as opposed to what investors are willing to pay because of greed or fear. These valuations inherently take into account ESG practices and the impact that these will have on the sustainability of an asset’s returns. Based on this, our fund managers make decisions that take advantage of these market efficiencies, without being influenced by emotions. Since we are valuation-based investors, we are convinced that by sticking to our guns in the long-term and riding out volatile and uncertain periods, we will be able to deliver a consistent, compelling long-term investment performance for our clients.

2018 Operational Performance Overview

The South African equity market reflected no growth on an average basis in 2018. Low investor confidence in an uncertain South African environment resulted in lower net fund flows, which combined with the weak equity market performance, placed significant pressure on the level of assets under management and profitability.

The main focus of SIG remains to build client facing business units and place a stronger focus on understanding and meeting clients’ needs while collaborating with internal business divisions to leverage skills and resources in the business. An outward-looking client-facing model was introduced over the past few years. The cluster restructured its UK business and separated Sanlam-focused and third-party investments in South Africa. These changes delivered higher inflows and confirmed the need to provide greater autonomy to investment units, while aligning the goals of investment performance more closely to growing our assets under management. The main strategic changes and interventions by the business over the last 12 months centred on the consolidation and optimisation of the business which focuses on managing Sanlam Group assets. This led to the formation of Sanlam Specialised Finance (SanFin), which is responsible for the management of Sanlam Group assets. SanFin consists of the Sanlam Capital Markets (SCM) business, including the Central Credit Manager, Sanlam Structured Solutions and the Sanlam Portfolio Management/ALCO teams. The intention is to optimise the risk, return, capital and liquidity requirements of the broader Sanlam Group through the integrated business unit.

The South African investment management business continues to focus on third-party clients and build a more competitive business in the non-traditional space. With depressed expected investment returns from traditional asset classes, it will become key to provide solutions and services in the alternative asset classes. The business is developing capacity in infrastructure, private equity, unrated credit, unlisted property and African funds. We are also placing a high focus on entrenching the leading position of Satrix in the index tracking segment of the market.

One of the most important opportunities to leverage between clusters is collaboration between SIG and Glacier regarding the multi-manager capabilities and distribution incentives to support Retail Implemented Consulting.

Read more about SIG’s financial performance in the Financial Review.

Our philosophy is based on rational decisions and thorough research.

Investment Market Trends Shaping SIG’s Future

The move from defined benefit to defined contribution funds over a number of years resulted in the latter becoming the dominating form of retirement savings worldwide and in South Africa. This moved the risk of retirement outcomes away from the employer to the employee. Whereas employers would have had to fund shortfalls in defined benefit schemes in the past, individuals now take significantly more interest in their pension plans. This interest at an individual member level is expected to intensify even further. This has wide-ranging implications for SIG in service delivery, intermediary interaction, product performance, digital platforms, design of solutions, speed of implementation and reaction to changes and requests. The end client and his adviser will continue to demand high levels of delivery on all of these elements of product and service.

In South Africa, the lower end of the market is gravitating towards umbrella schemes. An umbrella fund allows multiple employers to use a single pension or provident fund structure to help their employees save for retirement. The fund provides the structure and tax benefits, while the employees’ investment return come from the underlying investment portfolios.

SIG has an opportunity to closely align to the Sanlam Umbrella fund and build relationships with other funds. At the middle to higher end of the market, the use of intermediaries is more prevalent. For intermediaries, platform and solutions providers are critical components in the value chain. They gravitate towards investment firms that can provide competitive investment solutions and are aligned to a strong LISP platform. Glacier is well-positioned to provide these solutions.

Regulators continue to be more intrusive and active in their objective to promote beneficial outcomes for clients. Full transparency of investment activity and products is a requirement at all levels as regulatory and tax reciprocal rights strengthen across the globe. Reporting requirements for investment firms continue to increase and this trend will not abate. RDR or similar regulation on free models will be introduced and applied also in South Africa. Investment firms such as SIG that have a predisposition towards high levels of compliance and ethical cultures, will benefit from this environment while other players find it more difficult to survive under the scrutiny of the regulators. While it does increase the cost of operations, SIG can use technology to improve processes and reduce cost of delivery.

The increasing level of regulation and transparency also results in increased pressure on fees. The current low levels of investment return in the market amplifies this. The move from high-fee managers to lower-fee managers and products will be a continuing trend.

Lower returns have become a market characteristic in many countries, but the recent experience in South Africa has been exceptional in its duration. South African equity markets are a good indicator of asset growth since it remains the highest component of most investment solutions for clients. The JSE All Share Index has delivered lackluster and volatile returns over recent years, driven by increased long-term rates worldwide. The low-return environment results in a search for yield by investors and their intermediaries. With the listed and traditional space under pressure, asset classes with high-return characteristics, or alternatively which has asymmetric risk characteristics, are in demand. SIG will continue to develop and nurture competitive capabilities in the alternative space where higher yields can still be extracted from asset classes like unlisted credit, infrastructure and private equity. This can be challenging as the unlisted space often requires alternative and different operating models, structures, and have unique investment team requirements to be successful.

The continued reduction in the cost of technology, including data storage, software and equipment cost, resulted in a proliferation of technologies and potential solutions, also in the investment industry. This brings improvement in investment processes: Investment managers are now using a myriad of technologies in their investment decision process, including Artificial Intelligence and other advanced analytical techniques. The transition to augmented investment processes is accelerating as the volume of available data rises exponentially.

The increasing availability of technology solutions benefits client interactions and enables technology-inspired client experiences designed for the digital era. New solutions are also leading to advances in understanding client behaviour and preferences. The availability of significant data sets that are linked to external data sources – internal and in the wider Group – creates the potential to improve products for clients and improves sales activity.

This is an area of accelerating change and many non-traditional players and competitors are active and entering this space. There is the real potential for significant disruption emanating from this area. SIG is investing in people and technology to prepare for these fundamental changes.

There has been a significant and accelerating use of index-tracking funds worldwide. The product addresses many of the challenges faced by clients and intermediaries, including inconsistent investment performance over long periods of time. The low cost of index-tracking solutions also assists clients and intermediaries in achieving better net investment return outcomes. Regulators also favour solutions with higher proportions of index-tracking components. The exponential growth in funds being diverted to index-tracking funds is expected to continue. SIG’s Satrix index-tracking capability is a competitively branded and priced solution in this segment.

Our Transformation Priorities

Based on the South African reality, it is the responsibility of all businesses in the country to support economic transformation and to create equal opportunities for all in the workplace. At the heart of the business’s transformation strategy must be authenticity and sustainability. Meeting scorecard and client requirements are important, while SIG’s view is that transformation should be authentic and genuine in its intention to develop, nurture, mentor, empower and fast-track the black investment professionals who will be the future leaders of the investment management industry. We made significant progress in achieving this and will continue to make it a focus into 2019 and beyond.

Strategic Short- to Medium-term Priorities

  • Maintaining consistent superior investment performance
  • Using business intelligence capability to apply data analytics in pursuit of product innovation, to enhance client and intermediary experience, and to support operational efficiencies
  • Leveraging capabilities across businesses to provide holistic solutions for retail and institutional clients, including closer cooperation with SPF
  • Seizing the passive and alternative opportunities
  • Strengthening the turn-around of Sanlam UK, positioning the business for future growth and enhancing offerings for our African client base
  • Dealing with fee income pressures through targeted cost-reduction initiatives
  • Continued focus on transformation and people development
  • Driving retail flows through outcomes-based fund management

  Sustainability material matters

Case Study: Transparency on Proxy Voting and Engagement Activity

Since 2010, the number of shareholder meetings Sanlam Investment Management (SIM) votes at varies seasonally between 40 and 90 per quarter. Of those, 75% are annual general meetings. Over the eight years, the number of resolutions per meeting increased due to unbundling, with an average of 1 200 resolutions per quarter. Over the period, SIM declined 10% of resolutions, of which 90% were approved by meetings. Of those not approved, some resolutions were withdrawn.

SIM’s reasons for declining resolutions are mostly related to remuneration and limiting general access to capital. SIM voted more favourably on share repurchase requests but declined resolutions to limit share issuance on a general basis. Reasons for declining remuneration resolutions are mostly due to policy: we concentrate on remuneration inputs more than outputs and prefer that a significant proportion of hurdles in long-term incentive schemes measure returns that are higher than the cost of capital plus a margin. We prefer incentive to retention schemes.

Since 2011, SIM’s reasons for engagement have mainly been on remuneration arrangements, followed by malpractice and performance.

SIM’s proxy voting guidelines were first defined in 2006. At the time we chose to report on implementation directly to clients and investee companies. We have been showing aggregated voting data in the form of charts publicly on our website since 2012. In 2017, we placed the unabridged Responsible Investment Policy Document (which includes our voting guidelines) on our website, and in 2018, we have added a public disclosure of our voting activity per resolution. SIM’s proxy voting, responsible investment approaches and Annual Responsible Investment Report are available on www.sanlaminvestments.com.

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