Re­brand­ing of tainted Zuma should be re­jected with the con­tempt it de­serves

Re­sources the only JSE subindex to grow while in­vestors fled com­modi­ties

Business Day - - FRONT PAGE - STEPHEN CRANSTON ● Cranston is Fi­nan­cial Mail as­so­ciate ed­i­tor.

It is now quite suitable for re­tail in­vestors to use ex­change-traded funds (ETFs) as the build­ing blocks for their in­vest­ment strate­gies. These funds are all in­dex track­ers in SA, though there is no rea­son we should not fol­low in­ter­na­tional trends and in­tro­duce ac­tive funds in fu­ture. For now, though, the Fi­nan­cial Ser­vices Con­duct Au­thor­ity (FSCA) ap­proves only funds that track ex­ist­ing in­dices.

There are some prac­ti­cal dif­fer­ences to a tra­di­tional fi­nan­cial ad­viser-driven unit trust-based strat­egy. ETFs must be bought through a stock­bro­ker, and that doesn’t mean go­ing to one of those wood-pan­elled of­fices to deal with a slightly in­tim­i­dat­ing man in a suit. Buy­ing ETFs through the likes of EasyEquities or Absa On­line seems like buy­ing di­rect, though tech­ni­cally it is an “in­ter­me­di­ated” trans­ac­tion.

Few ETFs are avail­able from the tra­di­tional linked-in­vest­ment ser­vice providers such as Mo­men­tum, Al­lan Gray Lisp and In­vestec IMS, partly be­cause there has been lim­ited de­mand from fi­nan­cial ad­vis­ers and on a net ba­sis Lisps are cut­ting back on prod­uct, not adding to it.

There is also the tech­ni­cal is­sue that ETFs, as listed “shares” on the JSE, trade through­out the day and are repriced con­stantly. Con­ven­tional unit trusts are priced only once a day.

It is not sur­pris­ing that many ad­vis­ers, whose core com­pe­tence is sales and mar­ket­ing, are reluc­tant to add to their in­vest­ment home­work by learn­ing about ETFs.

There are now 94 funds, ac­cord­ing to Ne­rina Visser, a strate­gist at et­fSA, which of­fers prod­ucts such as re­tire­ment an­nu­ities built off bas­kets of ETFs and their close cousins ex­change-traded notes (ETNs).

There is some coun­ter­party risk in ETNs be­cause they do not repli­cate an in­dex. You won’t have an un­der­ly­ing hold­ing of three Naspers shares and three An­g­los, for ex­am­ple. In an Alsi 40 ETN, you will just get a prom­ise to give the same re­turn as the in­dex.

Visser says it would have been dif­fi­cult for just about any com­bi­na­tion of ETFs to give a pos­i­tive re­turn in the past year. The Alsi 40 was down 8.3%, and the Share­holder Weighted, or Swix, was down 12.4%.

Of the subindices of the JSE, only the re­sources in­dex pro­vided a pos­i­tive re­turn, with Sa­trix Resi pro­vid­ing 16.3%, yet it had out­flows equiv­a­lent to 15% of its mar­ket cap.

Even in bonds, clients would have lost money in two of the three in­fla­tion-linked funds.

Visser says the clas­sic coun­ter­cycli­cal as­set classes such as listed prop­erty, rand hedges and smart beta prod­ucts failed to pro­vide hedges against poor lo­cal and global eq­uity mar­kets.

The US eq­uity mar­ket pro­vided some re­lief, with S&P 500 track­ers giv­ing a pos­i­tive re­turn of about 10% in rand. The only com­pa­ra­ble re­turn has been 10.2%, from the highly un­der­rated Cloud At­las African Eq­uity ETF. Syg­nia’s Euro­pean and UK track­ers were both neg­a­tive.

ETFs used to be dom­i­nated by Absa’s New Gold, which is a con­ve­nient way to buy gold bul­lion but hardly an in­dex tracker. Over the year the share of these com­mod­ity ETFs has fallen from half to one-third of the in­dus­try. Close to R15bn was re­deemed. But Absa New Funds re­mains the largest ETF provider with R21.6bn un­der man­age­ment. In 2018 it in­tro­duced two the­matic funds: a low volatil­ity and a value eq­uity fund.

Syg­nia over­took in­dus­try pi­o­neer Sa­trix with R17.4bn un­der man­age­ment. Syg­nia’s Magda Wierzy­cka was a late con­vert to ETFs. Syg­nia’s core of­fer­ing is the old DB-x track­ers it bought from Deutsche Bank. It added the Fourth In­dus­trial Rev­o­lu­tion Fund, which is more of a po­si­tion­ing state­ment for the Syg­nia group than a red-hot com­mer­cial prod­uct but it washes its face with about R200m un­der man­age­ment.

Sa­trix is fight­ing back. It has a Nas­daq tracker, which is a more main­stream way of ac­cess­ing global tech, as well as a Mo­men­tum fund, which was launched at al­most ex­actly the same time as Mo­men­tum’s non­pay­ment scan­dal. But there is no other suitable name for the fund, which chases shares that get more ex­pen­sive. It has no con­nec­tion to Cen­tu­rion.

It is good to see that Stan­lib isn’t happy just to be Lib­erty’s cap­tive man­ager and is launch­ing some in­ter­est­ing ETF prod­ucts such as a Global Real Es­tate In­vest­ment Trust Fund and a G7 gov­ern­ment bond in­dex.

It is clear that the FSCA is not al­low­ing the list­ing of any more bal­anced funds. There are only two: the Absa MAPPS Growth and Pro­tect funds. Over five years they have both pro­vided eq­uity-like re­turns at much lower volatil­ity than the mar­ket. The MAPPS funds op­er­ate as di­rect in­dex track­ers, which is quite a cum­ber­some way to run a bal­anced port­fo­lio.

In­vest­ing would be far more con­ve­nient if the FSCA would al­low ETFs to op­er­ate as funds of funds. To mimic most lo­cal eq­uity funds it would need to be 75% in the Alsi and 25% in MSCI World. But the FSCA is de­ter­mined to keep ETFs pure in­dex track­ers.

In the mean­time, there are com­pe­tent blended port­fo­lios avail­able from et­fSA and iTrans­act. Visser used to run the Betta Beta port­fo­lio at Ned­bank, known af­fec­tion­ately as the Beta Blocka be­cause of its pop­u­lar­ity with the over 60s.

But fi­nan­cial ad­vis­ers like to be spoon­fed bal­anced funds with a fa­mous brand name on the tin. And why not?

/Fi­nan­cial Mail/Jeremy Glyn

Down­side: Ne­rina Visser, a strate­gist at et­fSA, says it would have been dif­fi­cult for just about any mix of ETFs to give a pos­i­tive re­turn in the past year.

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