ABSA NewFunds Volatility Managed Defensive Equity
This ETF has delivered -2.20% on a year-to-date (y-t-d) basis as at 30 September 2022, underperforming relative to its benchmark, the NewFunds/Absa Volatility Managed SA Defensive Equity Index which was at 1.52%. The fund has seen pressure in companies such as Vodacom and Capitec while Gold Fields remained relatively flat with British American Tobacco having improved on a year-to-date basis.
Prosus recently announced termination of a $4.7bn deal to buy BillDesk, this despite earlier approval in September 2022 from the Indian antitrust regulator which would have resulted in a top 10 international payments company. Nevertheless, the company noted that not all conditions were fulfilled in September, hence the cancellation. According to Bloomberg, the condition in question was a final go-ahead from competition authorities, which did not materialise. Prevailing global economic conditions may have also played a role in the collapse of the deal, particularly with regards to the valuations. Dampened economic prospects have had a negative impact on technology stocks due to downgrades in prospective earnings and ultimately valuations. The purchasing price would have likely become somewhat unjustifiable in the current market with Citi Bank noting consistent pushback from investors regarding the valuation and price of BillDesk. Fintech valuations have fallen sharply since Prosus announced plans to buy BillDesk. Prosus CEO Bob van Dijk said in the company’s annual report in June that the merger of PayU with BillDesk would create a “top-10 online payments company globally”, substantially increasing the company’s scale in India and strengthening its digital banking arm – “pending regulatory approval”. BillDesk processed $92bn of payments in the year ended 31 March 2021 and had a net profit of 2.71 billion Indian rupees ($37.05m) for that period.
The portfolio will track and replicate the NewFunds/Absa Volatility Managed SA Defensive Equity Index, an index which allows an investor to gain full market exposure to a universe of 30 liquid, JSE-listed equity securities selected on a factor specification to low volatility characteristics demonstrated in their performance. The portfolio will comprise both equity securities and cash (assets in liquid form), the proportion of which will be determined by the risk management process (the concurrent target volatility control mechanism and drawdown management process). Its tracking error (the standard deviation of ETF returns minus benchmark returns) of 1.13% suggests that any given return deviation from the benchmark may be an additional 1.13% higher or lower. This tracking error is worse than both its peers; NewFunds Volatility Managed Moderate Equity ETF (0.33%) and NewFunds Volatility Managed High Growth Equity ETF (0.47%) as at 30 September 2022.
Fund suitability
- The target volatility control mechanism aims to increase the proportion allocated to equity securities during periods of low volatility and, in turn, increases the proportion allocated to cash during periods of high volatility. The financial sector may benefit from the current hiking of interest rates by the reserve bank to curb inflation. Furthermore, the defensive nature of consumer non-cyclicals offers growth over the long-term for investors. However, due to the prevailing inflationary pressures, the short term will likely result in increased volatility in both SA and the UK.
Fees
- The fund has a total Investment cost of 0.77%.
Top Holdings
- The fund has cash and the NewFunds TRACI three-month EFT as its top two holdings while British America Tobacco and Capitec are the top two stocks. With regards to top sector weightings, the fund has 14.16% in Financials, 11.69% in Consumer NonCyclicals and 7.09% in Consumer Cyclicals. Investment by country has the most weighting in South Africa at 72.48% followed by the UK at 5.43%.
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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
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