This article was first published in the third-quarter 2012 edition of Personal Finance magazine.
It had to happen! Balanced exchange traded fund (ETF) portfolios are now available to local investors, thanks to Anglorand Capital and its iStocks Global ETF Account. But read no further if you do not have at least R100 000 to invest.
Anglorand Capital assumes the responsibility for wrapping existing ETFs into risk-adjusted portfolios. In the unit trust market, these kind of portfolios are known as funds of funds.
With about 1 000 local unit trust funds available to investors, a fund of funds is intended to solve the problem of selecting the right fund. However, there are two problems with funds of funds:
* Costs. You pay the manager who selects the funds – so you pay a fee to the multi-manager and you pay again on each of the underlying funds. Taken as a group, the total expense ratios (TERs) of funds of funds are on the upper scale of the costs of collective investment schemes (unit trust funds and ETFs) with the Verso Multi-Managed Equity Fund of Funds hitting the gong for all collective investments with a TER of 4.81 percent.
A TER is the ratio of most of the costs of the portfolio/fund divided by the assets of the portfolio/fund. The main exclusion is commission and advice fees.
Many funds of funds are run by financial advisers who, in effect, “clobber” their clients twice – once with an advice fee and then with an often-above-average asset management fee.
* Wide choice. There are now so many funds of funds that it is as difficult to select a fund of funds as it is to select a vanilla (ordinary) unit trust fund.
Index-tracking has become increasingly popular amid the ever-increasing costs of actively managed unit trust funds and the difficulty of selecting an active manager that, after costs, will provide consistent above-market returns.
Index-tracking investments come in two main forms for South African investors:
* Index-tracking unit trust funds; and
* Exchange traded products (ETPs), which include ETFs (most of which are registered in terms of the Collective Investment Schemes Control Act).
While all local collective investment scheme ETFs invest in the actual underlying listed shares, their close cousins in the ETP market, exchange traded notes (ETNs), do not. ETNs promise to provide the performance of a predetermined index but, to provide that performance, will often invest some or all of your money in derivative products.
All ETPs, both ETFs and ETNS, are listed as securities on stock exchanges. There are now 37 ETFs and 21 ETNs listed on the JSE, and many thousands are listed on international exchanges. There are also 14 unit trust funds that track various FTSE/JSE indices.
Anglorand Capital has one locally managed ETF portfolio and three foreign ETF portfolios. The three foreign ETF portfolios can be accessed through:
* Rand-denominated investments via asset swaps (you invest in rands and receive your returns in rands). Anglorand handles the exchange control issues, with the price for doing so included in its costs.
* Your one-off offshore investment allowance of R4 million (R5 million if you include the discretionary allowance of R1 million). You hold the investment offshore and have to obtain the tax and exchange control clearance yourself.
The four Anglorand portfolios are: the MyGlobal Research (MGR) South African ETF Portfolio, the MGR High Growth ETF Portfolio, the MGR Moderate Growth ETF Portfolio and the MGR Conservative Growth ETF Portfolio.
Gary Durant, director of Anglorand Capital, says the portfolios themselves are not at this stage listed as ETFs, although consideration is being given to listing the South African portfolio on the JSE as an ETF.
Anglorand is an asset manager registered with the Financial Services Board (FSB). Its licence allows it to compile and administer managed portfolios for clients. In terms of the ETF portfolio structure, the money you invest is held by custodians to provide greater security.
The portfolios are not actively managed and keep down their fees by investing in lower-cost ETFs and employing quantitative analysis (quants), which, in simple terms, means using various mathematical calculations (algorithms) to determine the best combination of underlying ETFs. Durant says the algorithms are structured to seek the best asset combinations and the best ETFs in each asset class.
The South African portfolio has a maximum exposure to equities of 65 percent, via ETFs.
With the global portfolios, the High Growth Portfolio can invest entirely in equities, while the equity exposure of the Moderate Growth Portfolio is limited to 85 percent and that of the Conservative Growth Portfolio to 50 percent.
Each portfolio provides an overall risk rating using the JP Morgan Var model.
The main features of the iStocks Global ETF Managed Portfolios are:
* A minimum investment of R100 000.
* An annual management fee of 0.9 percent.
* A performance fee of 10 percent on performance above a “high-water mark”, calculated quarterly after fees. In other words, you are not charged a performance fee twice on the same growth if there is a reversal in the market.
* The underlying ETFs have a TER ranging from 0.20 percent to 0.55 percent (adviser and platform fees not included).
Anglorand Capital has also stolen a march on the local ETF industry by offering local and foreign ETFs on a single administrative account, with global execution and live reporting. You do not have to chose one of its risk-adjusted balanced portfolios to invest in an ETF – the iStocks ETF Account offers all the local ETFs and almost 100 global ETFs.
The minimum investment amount in the individual ETFs is R10 000.
The iStocks ETF Account provides independent fact sheets, a risk rating on each ETF and a combined risk rating on an overall portfolio for investors and their financial advisers.
The account allows direct trading and daily valuations in any main currency of your choice.
Again, with the foreign-listed ETFs, you have the choice of either investing in rands and receiving your returns in rands via the asset-swap mechanism, or using your foreign investment allowance.
Anglorand’s administration fee is 0.5 percent a year, which does not apply to any amount invested in one of its managed ETF portfolios.
Durant says Anglorand is in the process of registering with the FSB in terms of the Pension Funds Act so that it can sell and administer ETF portfolios for retirement funds. Anglorand is also investigating providing retirement products, such as retirement annuity funds and investment-linked living annuities, for individual investors.