Catch this insight by Intellidex on the South African equity market. This note is on the Ashburton MidCap ETF giving investors exposure to JSE-listed companies with market capitalisation rankings that fall between 41st and 100th. The ETF is suitable for long-term investors seeking exposure to domestic medium-size
Intellidex insight:Publicly traded companies are usually classified into three groups based on the size of their market capitalisation – small caps, midcaps and large caps. The Ashburton MidCap ETF give investors exposure to JSE-listed companies with market capitalisation rankings that fall between 41st and 100th.
Historically, small and mid-size firms have tended to outperform larger ones and there is a lot of literature which
explains this “size factor” phenomenon. The outperformance of smaller firms compensates for their relatively higher risk profile – the size factor or premium popularised by Fama and French in their 1992 expanded capital asset pricing model. Smaller companies also have more scope for growth.
However, recent performances on the JSE show that smaller stocks have exhibited elevated risk and lower returns, significantly underperforming their large-cap counterparts. With the economy under siege this is not surprising because the small and midcap companies are predominantly SA-facing, ie, they derive most of their business in the country. Larger companies often have significant offshore exposure.
An idiosyncracy of the Ashburton MidCap ETF is that companies that perform well get elevated out of the fund as they grow and move into the top 40 indices, while the fund absorbs underperformers that fall out of the top 40. Balancing this somewhat are the small-cap achievers that grow into the midcap index.
Fund description: The Ashburton MidCap ETF tracks the component equities of the FTSE/ JSE MidCap index in proportion to the index weightings.
Click logo to view
Ashburton MidCap ETF
Top holdings:The top 10 holdings constitute 43.5% of the fund, with the biggest holding, Aspen, accounting for 6%. The diversification is satisfactory.
Suitability: The ETF is suitable for long-term investors seeking exposure to domestic medium-size
companies. Equities, and specifically smaller size companies, exhibit higher short-term volatility
than other asset classes, so a longer investment horizon gives the portfolio time for returns to accumulate ahead of volatility.
Net asset value performance to end-June 2020 (annualised for periods greater than one year)
Fundamentals: The ETF is dominated by SA-facing companies whose prospects are largely driven by local economic activity. Even before Covid-19 hit our shores, most economic indicators were flashing red lights characterised by low industrial output, stagnant retail sales, high unemployment and low business and consumer confidence. This is now set to worsen and the disparity in returns between midcaps and large cap stocks is quite telling. In SA’s context, it is only in the very long term that midcaps (marginally) outperform the large caps, as shown in the graph below.
At Intellidex we see the South African economy shrinking by 10.4% this year, which will be the worst decline on record. The medium term is not promising either – we expect the economy to return to pre-Covid levels only after at least three years if no drastic structural policy changes are implemented. This puts the midcap fund growth potential in doubt in the short to medium term.
Click logo to view
Ashburton MidCap ETF
Alternatives: This fund has no alternatives.
Click below to view
Ashburton MidCap ETF FACTSHEET
Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
If you thought this blog was interesting, you should also read:
This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.
The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.
Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing firstname.lastname@example.org.
Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.