Suitability: The NewFunds MAPPS Growth and MAPPS Protect ETFs are the only listed exchange-traded funds on the JSE that provide exposure to a diversified mix of asset classes in one portfolio. That makes them a good option for investors looking for diversified portfolios that could form the core of an investment strategy.
Other than these two ETFs, investors wanting to create a diversified portfolio have three options. The first is to buy unit trusts. This method is likely to be more expensive than ETFs because the majority of such funds are actively managed. Investors could also build their own mixed-asset portfolios, but that requires time and expertise. The third option is to invest in different single-asset class ETFs, but again this is unlikely to yield an optimal solution.
NewFunds’ multi-asset ETFs address the weaknesses of the above methods. They bundle the various asset classes into a single investment, sparing investors the administrative burden in a cost-efficient way. MAPPS Growth, our focus for this week, is designed to provide greater exposure to domestic equities, making it more suitable for younger investors who are willing to accept higher variability of returns in the short term in exchange for the prospect of better returns over the long term. The fund’s asset allocation complies with pension regulations so it can also be used to supplement retirement savings. With a dividend yield of 3.4% we also think it is also suitable for income seekers.
What it does: NewFunds MAPPS Growth replicates the total return performance of South African equities through the SWIX 40 index. It replicates nominal bonds through the GOVI index and inflation-linked bonds through ILBI index. The cash component is held in hard cash or allowable money market instruments. The portfolio targets the following asset allocation: equities 75%; nominal bonds 10%; inflation-linked bonds 10%; and cash 5%. It may however deviate from that between rebalancing periods that are done on a quarterly basis.
Advantages: The main attraction of this ETF is that it provides an inexpensive way of accessing a well-diversified portfolio. It is diversified across asset classes and is further diversified through the underlying investments in a range of securities within each asset class.
Top holdings: is made up of: domestic equities 74%; nominal government bonds 9%; inflation-linked government bonds 10%; and cash 7%. The Swix top 40 index adjusts the regular JSE top 40 index to eliminate foreign holdings and cross-holdings of the constituent companies. Because of that, the weightings of constituents in the MAPPS Growth portfolio are fairly even when compared to the JSE top 40 index. Only Naspers ends up being an outlier, contributing 15% of the portfolio while the rest contribute between 2% and 5% each.
Risk: Because of its diversity the ETF is considered to carry moderate risk over the medium to long term. The value of the ETF will rise and fall, tracking the underlying securities and as such investors’ capital is not protected. In our study of the local ETF market, we found that these multi-asset ETFs were more volatile than some of the single-asset class ETFs.
Despite having to track over 63 securities, which makes it one the most diversified of funds, MAPPS Growth has a reasonable total expense ratio. It charges an average of 33c/year for every R100 invested.
MAPPS Growth’s historical performance has been solid, outperforming a number of single-asset class ETFs. A R1,000 rand investment in this ETF at its inception about 4 ½ years ago would have been worth about R1,912 at end-December, assuming reinvestment of dividends.
Given that the fund is about 75% invested in equities, domestic stocks will have the biggest influence on its long-term performance. The equities holdings are dominated by consumer goods & services, health care and financial stocks. The performance of these stocks is largely dependent on economic growth prospects, locally and globally. The global economic growth outlook is uncertain and the South African economy is flirting with stagnation while teetering on the brink of a ratings downgrade, so the short- to medium-term prospects are not good. Despite this unpleasant outlook, we think the fund is invested in quality stocks, most of which have defensive qualities capable of doing well in the long run.
While the past decade has been a superb period for bonds, rising interest rates, the spectre of a ratings downgrade for SA and higher inflation expectations do not bode well for bonds.
If you find MAPPS Growth’s high exposure to the equities too aggressive, the NewFunds MAPPS Protect ETF might be a good alternative. MAPPS Protect is more conservative, allocating 40% to domestic equities, 15% to SA government bonds, 35% to SA inflation-linked bonds and 10% to cash. With this ETF, bonds have a much higher contribution.
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