Unless you're bullish on SA Inc, there's little reason to buy the Top 40 these days, which makes Satrix's JSE Global Equity ETF Index enticing
Simply buying the index on the JSE via an exchange-traded fund (ETF) or index tracker may be cheap (as fees are far lower than those charged by actively managed funds), but the recent performance of the broad South African market has been pedestrian. The Satrix 40 fund delivered a performance of 8,77 percent last year, with the JSE All Share Index (Alsi) up 2,9 percent.
A new ETF from the largest passive manager in the country, Satrix, offers investors exposure to locally listed shares but with a bias to global companies. In recent years, the weighting of inward-listed multinationals has been reducing, with these now only making up around a quarter of the Alsi. This will reduce even further in March when the All Share switches to the shareholder-weighted indices (SWIX) methodology.
Financials (banks and insurers) make up nearly 30 percent of the Top 40, so buying 'the index' means one is greatly exposed to this sector and 'SA Inc' as a whole.
Kingsley Williams, chief investment officer at Satrix, says: "This has exposed these equity indices more to local macroeconomic idiosyncrasies (often referred to as 'SA Inc. factors'), which clients may wish to diversify away from within their local equity exposure.
"The new ETF has a significantly higher rand hedge profile than other broad local equity market indices, providing a potential cushion should the local currency weaken.
"It also offers a diversified source of revenue from its constituents, with higher earnings emanating from offshore markets across a variety of sectors."
The new Satrix JSE Global Equity ETF Index tracks the recently launched FTSE/JSE Global Investor Index, focusing on the 50 biggest companies on the JSE (by market capitalisation). This more closely represents the All Share Index that investors may remember from years back - not the index as it exists today.
So-called 'grandfathered' companies are those that moved their primary listing offshore before October 2011. Alsi indices used to consider the global free float for these companies. Now only the locally registered free float is used (in other words, only a fraction of those companies are counted towards the index).
The five 'grandfathers' in this new index are AngloGold Ashanti, BHP Group, Investec plc, Mondi plc and Richemont. Together, they make up 28 percent of the Global Investor Index versus 17 percent in the Alsi. - Moneyweb
Other inward-listed stocks, which include AB InBev, British American Tobacco, Glencore, Prosus, Reinet and South32, comprise nearly 37 percent of the new index, compared to under 10 percent in the All Share.
Together, these companies, which generate a significant portion of their earnings (sometimes all) from offshore, are 65,1 percent of the Global Investor Index, contrasted with just 26,9 percent of the Alsi as at the end of January. This is a material difference.
It has a 35 percent weighting to resources and 39 percent to industrials (excluding Naspers and Prosus). Satrix says that "compared to the Alsi, this means a 6 percent overweight to resources and a 12 percent overweight to industrials (excluding technology), funded largely from an underweight to financials".
In investor documentation, it says back-testing "suggests that the strategy performs best compared to other local equity benchmarks during periods where the rand weakens".
The Satrix JSE Global Equity ETF will list on 12 March and is currently conducting an initial public offering. It has a total expense ratio of 0,15 percent. Moneyweb