ETFs cement their case as investment building blocks
Sound reasons why they are still a favoured investment avenue despite an almost impossible 2018
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 the future. For now, though, the Financial Services Conduct Authority (FSCA) only approves 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-paneled offices to deal with a slightly intimidating man in a suit. Ironically, that more accurately describes going to a financial adviser these days, since they no longer come to chat with you around the kitchen table but expect you to go to their offices, usually decorated like a stuffy gentleman’s club.
Buying ETFs through the likes of Easy Equities 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 the 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 re-priced constantly, whereas conventional unit trusts are only priced 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 as 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 (Swix) down 12.4%, not least because of higher exposure to an ailing Naspers.
Of the sub-indices 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 bond 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 rands. 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, and clients have the option of taking physical gold instead of cash. Absa New Funds, however, remains the largest ETF provider, with R21.6bn under management, and in 2018 it introduced two thematic funds: a low volatility and a value equity fund.
The year also saw Sygnia overtake 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 non-payment 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 letting any more balanced funds be listed. There are only two – the Absa MAPPS Growth and Protect funds, devised by the always creative duo of Costa Economou and Shaun Levitan at Colourfield. 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, at least five years after the rest of the world has accepted active ETFs. Even the Satrix Balanced Index Fund has been prohibited from appearing in ETF form.
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?