Pas­sive and emerg­ing

Finweek English Edition - - UNITTRUSTS -

LAST WEEK Deutsche Bank re­leased three new pas­sive in­dex-track­ing prod­ucts South African in­vestors will en­joy if look­ing at ex­po­sure off­shore. The prod­ucts are three ex­change-traded notes (ETNs) that track the MSCI China to­tal re­turn in­dex, the MSCI emerg­ing mar­kets in­dex and MSCI Africa in­dex. Finweek’s view on all three is pretty sim­ple: if you like the China in­vest­ment case, then the China prod­uct is nice but if you like the Africa story then you’d do far bet­ter go­ing with the Africa equity ETN from Stan­dard Bank. Our rea­son­ing is that the Deutsche prod­uct has 55% ex­po­sure to SA in its bas­ket; while liq­uid­ity will be a prob­lem for a while on the African ex­changes, early mover ad­van­tage must be in favour of those with the broader bas­ket. Emerg­ing Mar­kets Fund (1,55%) or the San­lam Global Best Ideas Fund (1,6%) you can see it’s a cheap way to get such ex­po­sure.

The man­aged prod­ucts have some skilled peo­ple in their ranks, which drive up their costs. But for the av­er­age re­tail in­vestor who doesn’t have R10 000 or R15 000 to in­vest in a sin­gle go then the Deutsche Bank prod­uct is prob­a­bly the way to go.

While they aren’t di­rectly com­pa­ra­ble, we’ll use them for the sake of our ex­am­ple. The San­lam fund has de­liv­ered a neg­a­tive 8% re­turn over the past three years, while the Corona­tion prod­uct has come in with a 16% re­turn and has built in a small in­come con­tri­bu­tion to its to­tal re­turn. Over the same pe­riod the net as­set value of the Emerg­ing Mar­ket In­dex rose 22%, with the Deutsche Bank ETF ris­ing a shade more than 19% over a three-year pe­riod.

The im­por­tant dis­tinc­tion to be made here is the two lo­cal prod­uct re­turns are based on rand per­for­mances while the Deutsche prod­uct is in US dol­lars. While the rand has played havoc with off­shore in­vestors, it’s hard to ar­gue against the pas­sive in­vest­ment route.

Both Deutsche and Corona­tion raise an im­por­tant point that needs to be con­sid­ered when look­ing at the val­u­a­tions at­tached to emerg­ing mar­ket stocks: that there are some sec­tors priced un­re­al­is­ti­cally and there are some that are very cheap and that’s likely to lead to volatil­ity. Summed up, you get emerg­ing mar­ket ex­po­sure (in­clud­ing Africa), you get some hedg­ing against a weak­en­ing rand, you aren’t im­pact­ing your off­shore al­lowance and you get all of that at a rel­a­tively low cost.

The Deutsche prod­uct gets a thumbs up from us.

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