Exchange Traded Funds Presentation 20 April, 2011
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Transcript of Exchange Traded Funds Presentation 20 April, 2011
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Exchange Traded Funds Presentation20 April, 2011
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Disclaimer
• I am NOT a registered financial advisor.• I am not paid any commissions to sell ETFs.• I am paid to write an ETF column by Investors
Monthly.• I am paid to write a quarterly ETF Review for
Itransact.• This presentation should NOT be construed as
advice or a recommendation of any kind.
In case you prefer to shoot and ask questions later
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Warren Dick
• Degree in economics and finance from UNISA• 7 years at Investec Private Bank• Financial journalist writing for Investors Monthly• Financial analyst for Investorcentre• Called the financial crisis of ‘07/08 • Blah blah blah
Some call me slim....
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The most important slide you’ll ever see
Stock markets generally tend to go up....
JSE All Share Index 1960 - 2011
Source: Profile media
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Exchange Traded Funds
• A basket of shares, bonds or commodities.• Put together in a methodical way.• Listed on an exchange.• Use indices as their building blocks.
What are they?
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Some famous indices:
• All Share index: Tracks the performance of 161 shares on JSE.
• Consumer Price index: tracks the change in the prices of a basket of goods.
• Dow Jones Industrial Average – NYSE.
Pick one you like
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Indices are everywhereAnd ETFs aim to mimic them!
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ETF Structure
ETF Issuer: eg RMB
Regulated by:• JSE as a listed
entity• FSB as a collective investment scheme
Man company usually a Pty Ltd.
Appoints:• Trustees (Bank) to
administer company• Asset manager to track the index being
followed• Market Maker to
provide liquidityInvestors purchase and
sell debentures/PI’s through JSE
Issuer creates Management Company
Issues: Debentures or participatory interests
Market Maker ensures shares
trade at NAV
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How are they constituted?Market Cap Methodology
Include shares in the index based on their
Market capitalisation=No of shares x share price
SIZE
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Anglo American Market Capitalisation
Closing share price 19 April: R342.70No of shares: 1,342m
Market cap = R342.70 x 1,342mMarket cap = R460.2bn
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Top 40 index: ranks companies on size
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The Top 40 by IndustryA little skewed to resources…
Basic Resources; 42.98%
Consumer Goods & Services; 22.38%
Financials; 17.50%
Healthcare;
0.79%
Indus-trials; 2.90%
Oil and Gas;
5.84% Telecoms; 7.61%
Source: Satrix, Investorcentre
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So then its a process of natural selection?
• Companies enter and exit the Top 40 when portfolio is rebalanced
• Only the strongest survive• This is a process of
‘natural selection’ • Don’t buy the needle buy
the hastack.
We’ve heard this before!
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And has been replicated on indices around the world:
• Locally: industrial companies “Indi”, resource companies “Resi”, financial companies “fini”
• Overseas: FTSE 100 (Footsie) S&P 500, Nikkei
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Then they got smart…
• Instead of picking on size, you pick on value (fundamentals)
• Research Affiliates Fundamental Indexation (RAFI)
• Enhanced Research Affiliates Fundamental Indexation (eRAFI)
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eRAFI vs RAFIRAFI (Satrix) eRAFI (ABSA Capital)
1. A company’s Book Value2. A company’s Sales3. A company’s Dividend4. A company’s Cash flow
Applies a further two SA specific criteria:Net Operating Assets ratioDebt Coverage ratio
Is rebalanced annuallyScreens all companies on the JSE
Is rebalanced quarterlyOnly selects companies from the Top 100.Charges a performance fee when it beats index
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On this team, we fight for that inch. On this team, we tear ourselves, and everyone around us to pieces for that inch. We CLAW with our finger nails for that inch.Cause we know when we add up all those inches that's going to make the f%$*ing difference between WINNING and LOSING between LIVING and DYING.
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Performance:Making rands and sense of it…
Equity Funds Ranked TER (2007-2009)
Funds Average TER Total Return (%)
5 Most Expensive Funds 2,97 10,88
10 Most Expensive Funds 2,65 15,67
Overall Average 1,59 14,89
10 cheapest Funds 0,92 19,19
5 Cheapest Funds 0,72 21,35
Source: DRW Investment Research (November 2010)
“Investors will do well to avoid the most expensive funds; simply because their actual performances do not justify the higher fees. Investors should rather, all else being equal, invest in low-cost funds and therefore stand a better chance of improving their returns.”
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Equity Unit Trusts versus the Benchmarks
Equity Funds 1-Year 3-Year 5-Year7-Year 10-Year
Number of funds 97 83 6350 38
Best performing fund 26,0% 14,5% 18,5%
24,5% 29,9%
Worst performing fund 1,0% -11,7% 8,0%
14,7% 13,3%
Top quartile 20,6% 6,8% 14,5% 20,7% 20,2%
Median 18,3% 5,1% 12,9% 19,5% 17,8%
Bottom quartile 16,5% 3,1% 11,4%17,9% 15,8%
Average 18,2% 4,8% 12,9% 19,5% 18,4%
Benchmark: ALSI 19,0% 6,5% 15,2% 21,0% 18,1%% Funds outperforming ALSI
37% 33% 15% 26% 49%
Benchmark: SWIX 20,9% 7,1% 15,1%21,6%
% Funds outperforming SWIX
22% 16% 12% 15%
1. Equity unit trusts in categories: General, Growth and Value Funds2. Total Returns Annualised3. Source: DRW Investment Research
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Fees (TER) as at 31 December 2010
eRafi
INDI
eRafi
Fini
eRafi
Resi eRafi
NewSA
Shari
ah To
p40
DB X-Track
er DJ E
uroSto
xx 50
DB X-Track
er FT
SE 100
DB X-Track
er MSC
I Japan
DB X-Track
er MSC
I USA
DB X-Track
er MSC
I World
Proptra
x
Satrix
RAFI
Satrix
RESI
Satrix
40
Satrix
DIVI
Satrix
FINI
Satrix
INDI
Satrix
SWIX
NewRan
d
NewGold
Inflation-X
Zshare
s GOVI
BIPS40
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
3.08%
2.09%2.08%
1.74%
1.43%1.37%
1.00%1.00%
1.00%1.00%
1.00%
0.75%
0.54%0.51%
0.47%0.45%
0.45%0.45%
0.45%0.44%
0.40%0.39%
0.34%0.29%
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But don’t take my word for itThe Oracle of Omaha says so….
"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.“
- Warren Buffett in letter to shareholders, 1996
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Your guide to the universe…
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As at 31 December 2010
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ETPs - a big deal overseas (US$ bn)
--------ETFs ---------ETPs Equity ETFs Fixed Income ETFs Commodity ETFsSource: Bloomberg, Blackrock
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But still small locally (R’bn)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2.75 3.584.73
5.61 6.04
9.18
12.0213.38
16.52
27.51
33.3
Source: Bloomberg
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Summary:
• Market cap indices are based on the size of the companies.
• Fundamental indices introduce different ways of picking the shares.
• You can get exposure to all asset classes locally.
• ETFs are cheaper than unit trust funds
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Getting some more of the good stuff
Now that you’re sold: ETF column in Investors Monthly (Business Day)Factsheets of product providers.ETF Quarterly Review – sign up for the email.ETFSA website
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THANK YOU