Exchange Traded Funds Presentation
20 April, 2011
Disclaimer
In case you prefer to shoot and ask questions later
• I am NOT a registered financial advisor.
• I am not paid any commissions to sell ETFs.
• I am paid to write an ETF column by Investors
Monthly.
• I am paid to write a quarterly ETF Review for
Itransact.
• This presentation should NOT be construed as
advice or a recommendation of any kind.
Warren Dick
Some call me slim....
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Degree in economics and finance from UNISA
7 years at Investec Private Bank
Financial journalist writing for Investors Monthly
Financial analyst for Investorcentre
Called the financial crisis of ‘07/08
Blah blah blah
The most important slide you’ll ever
see
Stock markets generally tend to go up....
Source: Profile media
JSE All Share Index 1960 - 2011
Exchange Traded Funds
What are they?
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A basket of shares, bonds or commodities.
Put together in a methodical way.
Listed on an exchange.
Use indices as their building blocks.
Some famous indices:
Pick one you like
• All Share index: Tracks the performance of
161 shares on JSE.
• Consumer Price index: tracks the change in
the prices of a basket of goods.
• Dow Jones Industrial Average – NYSE.
Indices are everywhere
And ETFs aim to mimic them!
Regulated by:
• JSE as a listed
entity
• FSB as a collective
investment scheme
ETF Structure
ETF Issuer: eg RMB
Appoints:
• Trustees (Bank) to
administer company
• Asset manager to
track the index being
followed
• Market Maker to
provide liquidity
Issuer creates Management
Company
Man company
usually a Pty Ltd.
Issues: Debentures or
participatory interests
Market Maker
ensures shares
trade at NAV
Investors purchase and
sell debentures/PI’s through
JSE
How are they constituted?
Market Cap Methodology
Include shares in the index based on their
Market capitalisation=
No of shares x share price
Anglo American Market Capitalisation
Closing share price 19 April: R342.70
No of shares: 1,342m
Market cap = R342.70 x 1,342m
Market cap = R460.2bn
Top 40 index: ranks companies on size
The Top 40 by Industry
A little skewed to resources…
Industrials,
2.90%
Healthcare,
0.79%
Oil and Gas,
5.84%
Telecoms,
7.61%
Financials,
17.50%
Consumer
Goods &
Services,
22.38%
Source: Satrix, Investorcentre
Basic
Resources,
42.98%
So then its a process of natural
selection?
We’ve heard this before!
• Companies enter and
exit the Top 40 when
portfolio is rebalanced
• Only the strongest
survive
• This is a process of
‘natural selection’
• Don’t buy the needle
buy the hastack.
And has been replicated on indices
around the world:
• Locally: industrial companies “Indi”,
resource companies “Resi”, financial
companies “fini”
• Overseas: FTSE 100 (Footsie) S&P 500,
Nikkei
Then they got smart…
• Instead of picking on size, you pick on value
(fundamentals)
• Research Affiliates Fundamental Indexation
(RAFI)
• Enhanced Research Affiliates Fundamental
Indexation (eRAFI)
eRAFI vs RAFI
RAFI (Satrix)
eRAFI (ABSA Capital)
1.
2.
3.
4.
Applies a further two SA specific
criteria:
Net Operating Assets ratio
Debt Coverage ratio
A company’s Book Value
A company’s Sales
A company’s Dividend
A company’s Cash flow
Is rebalanced annually
Screens all companies on the JSE
Is rebalanced quarterly
Only selects companies from the
Top 100.
Charges a performance fee when it
beats index
On this team, we fight for that inch. On this team, we tear ourselves, and everyone
around us to pieces for that inch. We CLAW with our finger nails for that inch.
Cause we know when we add up all those inches that's going to make the f%$*ing
difference between WINNING and LOSING between LIVING and DYING.
Performance:
Making rands and sense of it…
Equity Funds Ranked TER (2007-2009)
Funds
Average TER
Total Return (%)
5 Most Expensive Funds
2,97
10,88
10 Most Expensive Funds
2,65
15,67
Overall Average
1,59
14,89
10 cheapest Funds
0,92
19,19
5 Cheapest Funds
0,72
21,35
Source: DRW Investment Research (November 2010)
“Investors will do well to
avoid the most expensive
funds; simply because
their actual performances
do not justify the higher
fees. Investors should
rather, all else being
equal, invest in low-cost
funds and therefore stand
a better chance of
improving their returns.”
Equity Unit Trusts versus the Benchmarks
Equity Funds
Number of funds
Best performing
fund
Worst performing
fund
1-Year
3-Year
5-Year
97
83
63
26,0%
14,5%
-11,7%
8,0%
Top quartile
Median
20,6%
18,3%
6,8%
5,1%
14,5%
12,9%
Bottom quartile
16,5%
3,1%
11,4%
Average
18,2%
4,8%
12,9%
Benchmark: ALSI
19,0%
6,5%
15,2%
37%
33%
15%
20,9%
7,1%
15,1%
22%
16%
12%
Benchmark: SWIX
% Funds
outperforming
SWIX
1.
2.
3.
10-Year
50
38
24,5%
29,9%
14,7%
13,3%
20,7%
19,5%
17,9%
20,2%
17,8%
15,8%
19,5%
18,4%
21,0%
18,1%
26%
49%
18,5%
1,0%
% Funds
outperforming
ALSI
7-Year
Equity unit trusts in categories: General, Growth and Value Funds
Total Returns Annualised
Source: DRW Investment Research
21,6%
15%
Fees (TER) as at 31 December
2010
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
But don’t take my word for it
The Oracle of Omaha says so….
"Most investors, both institutional and
individual, will find that the best way to
own common stocks is through an index
fund that charges minimal fees. Those
following this path are sure to beat the net
results (after fees and expenses) delivered
by the great majority of investment
professionals.“
- Warren Buffett in letter to shareholders,
1996
Your guide to the
universe…
As at 31 December 2010
ETPs - a big deal overseas (US$ bn)
--------ETFs ---------ETPs
Source: Bloomberg, Blackrock
Equity ETFs
Fixed Income ETFs Commodity ETFs
But still small locally (R’bn)
33.3
27.51
16.52
12.02
13.38
9.18
2.75
2000
3.58
2001
4.73
2002
Source: Bloomberg
5.61
6.04
2003
2004
2005
2006
2007
2008
2009
2010
Summary:
• Market cap indices are based on the size
of the companies.
• Fundamental indices introduce different
ways of picking the shares.
• You can get exposure to all asset classes
locally.
• ETFs are cheaper than unit trust funds
Getting some more of the good stuff
Now that you’re sold: ETF column in Investors Monthly
(Business Day)
Factsheets of product providers.
ETF Quarterly Review – sign up
for the email.
ETFSA website
THANK YOU