ETF ANALYSIS
Suitability: Did you know that ETFs allow you to pursue an ethical investment strategy? Social investing is gaining momentum globally as more and more people become conscious of “ethical” investing. Locally, ETFs are following this trend with three funds having an ethical/social theme: Nedbank’s BettaGreen fund (we covered this in January); Absa’s Shariah Top40 and Absa’s NewSA fund. Our focus this week is on the NewSA ETF, a fund that is peculiar to SA and born out of SA’s historical imbalances. We will look at the Shariah Top40 next week.
Since 1994, the democratically elected government has pursued various channels to address financial imbalances created by Apartheid, with broad-based black economic empowerment (BBBEE) the cornerstone of its policy.
The NewSA ETF invests in companies with superior BBBEE ratings and is thus suitable for investors who feel morally impelled to invest to support transformation – or if you believe that companies with superior empowerment ratings have an economic edge. The fund consolidates 40 such companies and you can cost-effectively gain exposure through a single transaction.
The NewSA ETF’s constituents are drawn from the FTSE/JSE Top 40 index, but with weightings determined by their empowerment (BBBEE) ratings. The BBBEE ratings are calculated by Empowerdex, but the index is constructed using the FTSE/JSE methodology.
What it does: The fund tracks the price performance of the NewSA index, which is a modified FTSE/JSE Top 40 index that weights the top 40 JSE-listed companies in accordance to their empowerment ratings. These ratings are calculated according to the Department of Trade and Industry’s codes of good practice on BBBEE. The ratings have seven pillars: ownership; management; employment equity; skills development; preferential procurement; enterprise development; and socioeconomic development.
Top holdings: The top 10 holdings take up 74% of the portfolio and the biggest holding, SABMiller, disproportionately takes up 27% of the fund, which significantly reduces diversification benefits.
Risk: For some industries, such as retail, BBBEE ratings are not mandatory, so the trend is that those with BEE scorecards like banks and mining companies, and those that generate some business from state entities, have high BBBEE ratings. The implication is that the performance of constituents is likely to be correlated, that is, constituents perform well/poorly at the same time.
This is a pure equities investment, so the performance is likely to be more volatile than other asset classes such as bonds or cash. The fund is relatively illiquid, trading an average of only 1,230 units monthly in the past year.
Fees: For the year to end-March, 0.58% of the average net asset value of the portfolio was incurred as charges, levies and fees related to the management of the portfolio.
Historical performance: The fund’s performance depends on how you invest – through a single lump-sum payment or regular payments. The table below reflects the fund’s historical annualised returns for a lump-sum investment.
Fundamental view
One of the main attractions is that constituent companies tend to get preference when pitching for public contracts and these are usually big-expenditure items – for infrastructure development, for example. As long as the government and state-owned enterprises are investing to expand the economy, these businesses tend to benefit. However, recently companies that depend on government spending have performed poorly as most government institutions have cut spending.
Implementing an empowerment deal has financial cost implications for a company and usually results in diluting existing shareholders. However, since companies in this fund have high BBBEE ratings it means they have already incurred the bulk of these costs. So buying in now means there is low risk of dilution in future as these companies are relatively more compliant.
Alternatives:
There are no direct peers.
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 (in this case, JSE companies meeting threshold BBBE ratings). 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 more than one company in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the EasyEquities platform. In addition, it qualifies for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
Disclaimer
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