Passive and emerging
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.