Absa Capital reduces eRAFI ETFs management fees
- Gain for investors
- eRAFI™ ETFs far outperform their benchmarks
Absa Capital, the investment banking division of the Absa Group Ltd (Absa), announced today that as from June 1, it will slash the basic management fee on its eRAFI™ series of Exchange Traded Funds (ETFs) that weight shares based on fundamental valuation metrics.
The basic fee currently charged is on average 75-80 basis points per annum depending on the portfolio and the investor holdings. It will be replaced with a basic fee on a cost recovery basis taking into account only the direct operational costs of the eRAFITM ETFs. This will result in an immediate saving for the investors of 20-25 basis points (0.20-0.25%) per annum.
These savings will further increase with the increase in the size of the eRAFITM portfolios.
The current performance fee of 20% of the amount by which the eRAFI™ ETFs out-perform their benchmarks will remain unchanged. If in any year an eRAFI™ ETF doesn’t outperform its benchmark, investors will ‘claw back’ returns and only pay a performance fee after they have made up the underperformance.
Dr Vladimir Nedeljkovic, Head of ETFs and Index Products at Absa Capital, said: “We don’t believe investors should ever pay for anything other than out-performance and for direct costs for running the funds.”
“We are confident that the eRAFI™ will deliver superior returns so we are putting our money where our mouth is and basing our fees on superior returns.”
According to Nedeljkovic, since the launch of eRAFITM Overall ETF in June 2008 and the subsequent three Sector eRAFITM ETFs in June 2009, institutional and private investors have poured about R209m into the eRAFI™ ETFs, because of their superior stock weighing methodology that has seen them deliver better returns than traditional market capitalisation ETFs – and with lower volatility.
The eRAFI™ indices tracked by eRAFITM ETFs are compiled using the innovative enhanced Research Affiliates Fundamental IndexTM (eRAFI™) approach to portfolio construction pioneered by California-based Research Affiliates.
“The problem with market capitalisation method of indexing is that it overweights stocks that are overvalued and underweights stocks that are undervalued, the opposite of good investment practice,” said Nedeljkovic.
The eRAFI™ ETF methodology weights shares based on fundamental valuation metrics - sales, cash flow, book price and dividends - rather than market capitalisation.
The eRAFI™ Overall SA ETF has outperformed its benchmark JSE All Share Index by 11.92% on an annualised basis since inception in June 2008. Since their inception in June 2009, Sector eRAFITM indices – Industrial 25, Financial 15 and Resources 20 outperformed their respective benchmarks by 4.53%, 4.82% and 6.71% on an annualised basis.
Internationally, RAFI™ strategies have outperformed cap-weighted index strategies by more than 2.5% per annum in over 23 mature stock markets, and significantly more in emerging markets over extended measurement periods, noted Nedeljkovic.
In the US domestic markets, for example, RAFI™ strategies outperformed cap-weighted index portfolios, both large and small stocks, by just over 200 basis points (2%) per year with slightly lower volatility.
Furthermore, across international markets RAFI™ portfolios outperformed cap-weighted index portfolios by an average of 557 basis points (5.57%) per annum, also with slightly lower volatility.
Absa Capital, together with local investment manager Plexus Asset Management, exclusively manage the eRAFI™ ETF in South Africa.
“The eRAFI™ 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,” said Nedeljkovic.
