It is several years since the number of unit trusts in SA overtook the number of share listings on the JSE. And now the number of exchange traded products (ETPs) on the JSE, at 237, almost exceeds that of conventional share listings, now just 255.
Exchange traded funds (ETFs) are investment vehicles of choice for millennials and Gen Z. They are self-help generations who already bank digitally and insure their cars through direct insurers such as Outsurance and MiWay. It’s no accident, so to speak, that Outsurance now has a higher market capitalisation than Old Mutual.
The Big Green still relies on the increasingly anachronistic business model of tied agents and brokers (now restyled as independent financial advisers) in a digital business-to-consumer world.
ETFs are perfectly designed for the do-it-yourself investor and the day trader as they reprice throughout the day.
Baby boomer and Gen X day traders would have focused on small caps. It was an exciting market back in 1998, when cult managers such as Rhett Hammond at Investec were the talk of the town. There were many opportunities to make a quick buck from new listings.
Such opportunities are, sadly, few and far between in the 2020s. ETFs now make up about half of the assets on EasyEquities, the most successful of the do-it-yourself investment platforms.
More concentrated
Until recently, ETPs were synonymous with index funds, sometimes called “passive” investment. But the number of active ETPs is rising, with an alphabet soup of acronyms. There are actively managed contracts (AMCs), which allow boutique managers without a unit trust management company of their own to run specialist portfolios without the constraints of unit trusts. One rule that wouldn’t apply is the limit of a 5% allocation to each small cap and 10% to large caps.
This allows managers such as ClucasGray to offer more concentrated, higher-conviction funds than their unit trusts.
Actively managed ETFs (AMETFs) are a more recent addition to the mix. An interesting fund is the ETFSA Balanced Foundation fund, which the ETFSA brokerage has launched on the Prescient licence. “Foundation” refers to its role as a core portfolio; it’s not an oblique reference to Scientology.
The fund will not be particularly active, but it doesn’t have to follow an index slavishly. Still, it’s a commercial risk given the commercial failure of the pioneering Multi-asset passive portfolio solutions (MAPPS) funds. Launched in 2011, these funds did not get traction and have attracted barely R80m of assets under management.
It had some media attention when it launched as it was the brainchild of Colourfield’s Costa Economou and Shaun Levitan. Maybe it should have had some fun and used a brand name such as Low Costa, rather than the meaningless MAPPS.
DIY preference
The new ETFSA fund will have a competitive advantage as it will include offshore investments, potentially right up to the full 45% allocation. It will initially be used for ETFSA’s own client base, but it looks like a good low-cost default as a Regulation 28 pension fund direct investment. Why not simply buy it on the JSE and cut out the middle man?
Coronation has very different reasons for listing its unit trusts in an ETF format. It has much distribution already through its strong IFA franchise. But it recognises — maybe more than its peers — the younger generation’s preference for do-it-yourself investment, and for disintermediation.
Instead of setting up its own ETF administrative skills it has opted to set up feeder funds through the Prescient licence. Another advantage of not using its own unit trust management company for the ETFs is that it won’t be using up valuable offshore capacity that it needs for its balanced unit trust and segregated funds, which are still its bread-and-butter product. The Coronation team would starve without it.
Of the six ETFs, its Global Emerging Markets strategy has the strongest franchise, with a meaningful pool of foreign institutional investors. Global Strategic Income also has a following.
Coronation’s Global Capital Plus fund won a Raging Bull in 2023. It’s a good halfway house between the conservative and aggressive sector. Global Optimum has its fans, though it’s somewhat eclectic.
The jury is still out on the Global Managed and Equity Select funds, which are also available in ETF format.
• Cranston is a former associate editor of the FM.
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