Invest in Africa Through Exchange Traded Products

A new avenue of investment has recently been opened up to investors in South Africa, in the form of convenient JSE listed vehicles, through the recent listing of two Africa-based Exchange Traded Notes (ETNs).

ETNs are listed securities, registered and traded on the JSE, where the tracking of the underlying investment is guaranteed by the issuer. ETNs can be issued on the performance of a number of assets, including indices, baskets of equities or bonds, currencies, commodities and other financial assets. The issuer of the ETN has the obligation: to deliver the performance of the asset being tracked; to provide liquidity at all times on the JSE; and to create or redeem participatory units (listed ETN securities) at any time. Accordingly, the investors in such ETNs have to take into account the financial position of the ETN to meet its obligations, i.e. the creditworthiness and credit rating of the issuers.

In this way, Exchange Traded Notes (ETNs) differ from Exchange Traded Funds (ETFs), which are registered as Collective Investment Schemes and where the structure of the product covers the obligation to track the underlying assets being tracked and requires full physical holding of the assets at all times.

Why Invest in Africa?

With relatively poor investment performance occurring elsewhere in world markets, the “frontier markets” aspect of African investments is gaining some credence. Other arguments in favour of Africa investments include:

• IMF forecasts indicate a real GDP growth rate of some 6% per annum for the African Continent over the next few years, significantly higher than in many other areas of the world.
• Whereas South African equity market indices have a relatively high correlation with equity market returns in Europe, USA and Asia (0,7 to 0,8), the correlation between South Africa and the rest of Africa is only 0,3. Accordingly, clear benefits in diversification can be attained through investing in the rest of Africa.
• For institutional investors, the foreign exchange control regulations allow an additional 5% (over and above the normal 25%) of total assets to be invested in Africa. For investors wishing to reduce domestic exposure, this additional allowance in non-South African assets might prove attractive.

ETN Africa Products Currently Available

Deutsche Bank has issued the MSCI Africa Top 50 Capped Total Return ETN, which covers 49 companies listed in four African countries.

Standard Bank’s ETN, the Standard Bank Africa Equity Total Return ETN, covers 179 companies from 29 different African countries, either listed on African stockmarkets or international stockmarkets.

The Standard Bank product, without any exposure to South Africa at all, might suit local investors with heavy exposure already to South African equities, whilst the Deutsche Bank product, with 55% allocation to South Africa, might suit international investors.

Africa ETN Product Features

Both Standard Bank and Deutsche Bank Africa ETNs share the following features:

· Capped Indices – in order to reduce concentration risk, the exposure to any security is capped at below 10% in the case of the DBAFRI and 5% in the case of SBAEI.

· Total Return – both ETNs reinvest any dividends and other income received to provide a total return product.

· Low Costs – the DBAFRI ETN, with a total expense ratio of 0,85% has a slightly lower cost that the SBAEI which charges a 1% annual management fee.

African stockmarkets are typically very difficult and expensive to invest in and exchange rate conversion can be very costly. By offering exposure to diversified baskets of Africa equities at total costs of 1% or less, these ETNs offer extremely competitive cost structures compared with other Africa products available.