Old Mutual Global Index Trackers lists Emerging Markets ETF on NYSE

First African Asset Manager to list an ETF on a US Exchange

Old Mutual Global Index Trackers (OMGxT), the international index tracking business of Old Mutual Investment Group (SA) (OMIGSA), will become the first-ever African asset manager to list an exchange traded fund (ETF) in the US when it lists its new FTSE-based ETF for emerging markets o­n the New York Stock Exchange o­n Tuesday, 8 December.

The new ETF, not previously available in the US, will trade under the name GlobalShares FTSE Emerging Markets Fund. It offers US and international investors exposure to some of the world’s fast-growing emerging markets.

OMGxT is the international arm of OMIGSA’s well-established domestic specialist index tracker boutique Dibanisa Fund Managers. OMGxT was set up earlier this year by OMIGSA in order to take advantage of a gap it pinpointed in the US market for low-cost, low-tracking- error emerging market ETF products.

“Although the US market for ETFs is a very competitive o­ne, we saw that many of the large financial services groups offering these products were charging far higher fees for their emerging markets ETFs than for their standard domestic ETFs, where margins have been driven down to extremely low levels,” explains OMIGSA CEO Thabo Dloti. “At the same time, the tracking errors for the emerging market ETFs were often relatively high. We realised there was an opportunity for us to leverage off of our specialist index tracking capability, given Dibanisa’s relatively low costs and strong eight year track record for low tracking errors in South Africa.”

Furthermore, in a world-first for an Emerging Market ETF, OMGxT’s fund is offering, for a limited period, a “Zero Fee, Zero Cost” arrangement for the fund. Under this arrangement, OMGxT will cap the fund’s operating expenses (other than brokerage or other transaction-related expenses, taxes, interest, litigation expenses and other extraordinary expenses) at 0 basis points until the earlier of 31 January 2010 or until the net assets of the fund equal or exceed US$1 billion. This will be the first emerging market fund launched with such a zero cost waiver. Upon expiration of the “Zero Fee, Zero Cost” arrangement, the adviser has agreed to contractually waive a portion of its fees and/or reimburse expenses, such that the Net Expense Ratio is 0.39%, and the agreement is in effect until at least January 31, 2012.

According to Tendai Musikavanhu, managing director and chief executive officer of OMGxT, the firm is committed to being the first firm actually originating from the emerging markets to manage an emerging market ETF in the US.OMGxT also aims to be the low-cost provider of emerging markets exposure of choice.

Dloti points out that the new Old Mutual Global Index Trackers business does not overlap with Old Mutual Asset Managers US (OMAM US), the suite of US-based specialist asset management businesses that is also part of the wider Old Mutual Group. “OMAM US does not offer index tracking, ETFs or other passive investments that would compete with OMGxT; they are firmly focused o­n active asset management. This gave us in South Africa the opportunity to take our skills to the US and leverage off of Old Mutual’s well-known name there.”

Musikavanhu says that, in addition to the FTSE Emerging Markets Index being listed o­n Tuesday, OMGxT plans to list a suite of up to four other global and emerging market ETFs in the US in early 2010, all under the trading name GlobalShares. Plans are also in place to list similar products in Europe at a later stage, and to bring them to South Africa.

All of the international ETFs will be managed by the OMGxT and Dibanisa team in Johannesburg, taking advantage of its existing world-class IT systems and index tracking expertise built up since 2001, while also keeping costs low. This will ensure a BEE component to the business and create the opportunity for further job creation and international skills development. To demonstrate OMGxT’s commitment to the US market, Musikavanhu has relocated to the US, where he is overseeing the firm’s Boston office.

“ETFs are more popular than ever among US investors following the financial crisis,” Musikavanhu notes. “According to a recent report by ING Investment Management, they withdrew US$238bn from active non-index unit trusts in 2008 and put $134bn into passive index funds. The inability of many active managers to beat their benchmarks, plus market volatility and the low costs offered by ETFs, appear to have convinced even more investors to opt for tracker solutions.”

Musikavanhu adds that the popularity of emerging market investments continues to grow. “US investors recognise that these markets – like Brazil, China and India - can provide significant diversification and return opportunities. Relative to the developed markets, emerging market earnings have posted strong growth throughout this decade, and we believe this is a long-term trend. Over the next decade, the most attractive equity returns should be delivered by developing countries as they expand their commercial infrastructure and continue building a domestic consumer economy,” he says. “This is also a great opportunity for SA pension funds to ‘tilt’ a portion of their 20% offshore exposure from developed markets to much faster-growing emerging markets. The SA market’s return correlation relative to emerging markets is very similar to the corresponding MSCI World Index correlation. So emerging market exposure offers similar diversification benefits for SA investors but with higher forecast growth rates.”