More off­shore funds com­ing

A big com­peti­tor is on the way to SA — how will the lo­cals re­spond?

Financial Mail - Investors Monthly - - Analysis: Exchange-Traded Funds -

lobal flows into ex­change traded funds are grow­ing — fast. An es­ti­mated $20bn went into track­ers last year, in­creas­ingly from in­sti­tu­tional in­vestors and hedge funds that are re­plac­ing fu­tures con­tracts with ETFs to gain ex­po­sure to sec­tors or mar­kets or as a hedge against mar­ket risk.

ETF providers are go­ing head to head with deriva­tives con­tracts, of­fered by the likes of CME ex­change group glob­ally and Safex here in SA, as they pro­mote their prod­ucts as tools for man­ag­ing in­vest­ment port­fo­lios.

Un­sur­pris­ingly per­haps, SA is slightly be­hind the curve, partly be­cause of the cost of in­vest­ing in ETFs here rel­a­tive to the US and Europe. Liq­uid­ity also re­mains an is­sue for large in­sti­tu­tional in­vestors.

But the mar­ket could be in for a shake-up be­cause Black­Rock has fi­nally re­ceived ap­proval to mar­ket a sig­nif­i­cant num­ber of ETFs and index funds to lo­cal in­vestors. It’s the world’s big­gest as­set man­ager, with more than $4.5 tril­lion in as­sets un­der man­age­ment. It’s also the big­gest player in the ETF space.

Con­sil­ium Se­cu­ri­ties’ Nick Kunze says for larger in­sti­tu­tions to se­ri­ously con­sider us­ing ETFs for mar­ket ex­po­sure, the mar­ket needs to be far more liq­uid and not sub­ject to a hand­ful of mar­ket mak­ers. For smaller hedge funds, says Trofin’s Claudius Ros­tol, liq­uid­ity isn’t as big an is­sue.

And be­cause these funds don’t just ap­ply long-only strate­gies, the flex­i­bil­ity they of­fer is good. Funds can gain ex­po­sure to sec­tors with­out hav­ing to rely on large re­search teams. This is par­tic­u­larly rel­e­vant for off­shore ex­po­sure. It’s not al­ways the cheap­est op­tion, though, with av­er­age to­tal ex­pense ra­tios in the re­gion of 40 ba­sis points, well above the costs you’d pay in more ma­ture mar­kets.

Ac­cord­ing to a re­port in the Fi­nan­cial Times, two-thirds of Euro­pean and three-quar­ters of US in­sti­tu­tions sur­veyed said an S&P 500 ETF pro­vided more ef­fec­tive beta ex­po­sure than an S&P 500 fu­ture for a fully funded S&P 500 po­si­tion. Ease of use and lower costs were the main rea­sons cited for switch­ing from eq­uity deriva­tives to ETFs. Glob­ally, ETF fees have fallen dra­mat­i­cally over the years, par­tic­u­larly for less com­pli­cated “vanilla” funds.

How­ever, in SA, Ros­tol says, it’s still far cheaper to trade the Alsi or the Swix on the lo­cal eq­uity deriva­tives mar­ket. Spreads on Safex are also much tighter — as lit­tle as one or two ba­sis points — com­pared with as much as 50 to 100 ba­sis points in the ETF mar­ket.

To­gether with costs, those spreads may nar­row with Black­Rock’s en­try. The to­tal ex­pense ra­tios of Black­Rock’s ETFs are sig­nif­i­cantly lower than those lo­cal in­vestors pay. And it’s start­ing with an ex­pected 26 ETFs and 17 index funds. How­ever, these won’t be listed on the JSE for now, which means you can only ac­cess them through an off­shore bro­ker. There are also a num­ber of other lo­cal op­tions for buy­ing off­shore stocks in­clud­ing ETFs, such as Stan­dard Bank’s Web­trader.

Black­Rock’s new lo­cal of­fer­ing will grow the range of off­shore funds that fi­nan­cial ad­vis­ers can mar­ket to South African in­vestors. They’re aimed very much at the in­sti­tu­tional mar­ket though. Deutsche’s x-track­ers have ful­filled a vi­tal role and will con­tinue to do so for those seek­ing ex­po­sure on a ge­o­graph­i­cal ba­sis. BNP Paribas of­fers a range of ex­change traded notes too, giv­ing re­gional and global ex­po­sure.

What Black­Rock is go­ing to of­fer, though, is sec­toral ex­po­sure. In­fra­struc­ture, water and global prop­erty are just a few of the sec­tors it says it’s plan­ning to of­fer South African in­vestors. It’s not of­fer­ing its full suite of ETFs to the South African mar­ket though, choos­ing those that it sees most de­mand for af­ter can­vass­ing lo­cal in­vestors. It has had more than enough time to suss out the mar­ket — it opened its lo­cal of­fice al­most four years ago, so in­vestors could be forgiven for get­ting a lit­tle im­pa­tient wait­ing to sam­ple its of­fer­ing. This will also in­clude some low-volatil­ity ETFs for in­vestors look­ing for less vo­latile re­turns — and we’ve seen the suc­cess Core­shares has had with its LowVolTrax ETF.

It will be in­ter­est­ing to watch mar­ket in­cum­bents, in­clud­ing Sa­trix and Deutsche, to see how quickly they re­act to Black­Rock’s en­try — per­haps by cut­ting prices to re­main com­pet­i­tive. This in turn could boost the use of ETFs rather than deriva­tives con­tracts, which would only help to in­crease the depth of the mar­ket.

Black­Rock’s new lo­cal of­fer­ing will grow the range of off­shore funds that fi­nan­cial ad­vis­ers can mar­ket to South African in­vestors

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.