Absa Capital today announced a partnership with local investment manager Plexus Asset Management on a new JSE Exchange Traded Fund (ETF) that will for the first time weight shares based on fundamental valuation metrics thereby avoiding the inherent shortfalls of traditional market capitalisation weightings used by existing ETF’s.
With the RAFI™ indexing method, fundamental accounting measures of company size such as sales, cash flow, book price and dividends rather than market capitalisation are used.
Dr Vladimir Nedeljkovic, head of hybrid products of Absa Capital says, “The problem with market capitalisation method of indexing is that it overweights stocks that are overvalued in the market and underweights stocks that are undervalued – the opposite of good investment practice. An index portfolio will participate in every market bubble and will plunge with every market correction.”
The RAFI™ methodology provides all the benefits of traditional market capitalisation-weighted indices, including diversification, liquidity, low turnover and competitive fees, while generating incrementally higher returns with lower volatility.
“By avoiding the inherent valuation bias of capitalisation weighting, RAFI™ strategies have outperformed cap-weighted index strategies by more than 2,5% per annum internationally in over 23 mature stock markets and significantly more in emerging markets over extended measurement periods,” says Nedeljkovic.
The new ETF will be compiled using the innovative enhanced Research Affiliates Fundamental IndexTM (RAFITM) approach to portfolio construction pioneered by California-based Research Affiliates, which has been licensed to the Plexus group for the Pan-African region.
Dr Prieur du Plessis, managing director of Plexus, says: “We regard our agreement with Research Affiliates not only as a coup for Plexus, but also for South African investors.
“Together with Absa Capital’s expertise in the ETF market, we believe that we can bring products to the market that will benefit both the institutional and retail market by optimising risk/return parameters at affordable fees.”
Absa Capital is a leading originator of ETFs in the South African market. The company listed and operates NewRand, the first ETF in South Africa based on a proprietary investible index (the NewRand Index, comprising rand hedge stocks with the highest correlation with the Rand/USD exchange rate), as well as NewGold, the first gold ETF in South Africa and only the third in the world.
Dr Nedeljkovic says: “We believe that the South African market, and especially pension funds, are waking up to the advantages of passive index trackers, and that there will be a proliferation in both the number of ETFs listed on the JSE as well as the amount of money invested in these products over the next few years.
“RAFITM is a concept that will help shape the global investment landscape for years to come. We are therefore extremely excited about the co-operation agreement with Plexus as it allows us to use our expertise in the ETF market to bring new and innovative products to the South African market.”
Exchange-traded funds (or ETFs) are open-ended collective investment schemes that are listed on a stock exchange and which can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the FTSE/JSE Top 40 Index, a market sector such as resources or financials, or a commodity such as gold.
Nine ETFs are currently listed on the JSE, with a total market capitalisation of just under R11 billion.
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About Absa Capital
Absa Capital, a division of Absa Bank Limited (Absa) and affiliated to Barclays Capital, is a leading South African investment bank with global reach, offering clients financing, risk management and advisory solutions in a wide range of currencies and structures across the globe.