Absa Capital and Plexus Asset Management List SA’s First Funadamental Indexing ETF
In a further display of industry leadership, the Exchange Traded Funds and Index Products team at Absa Capital in partnership with Plexus Asset Management today listed the first-ever enhanced Research Affiliates Fundamental Index® (eRAFITM) Exchange Traded Fund (ETF) in South Africa on the JSE.
The eRAFI™ ETF is a portfolio under the NewFunds Collective Investment Scheme.
The initial public offer raised R370m in investments from institutional and retail investors. The fund is open-ended and the size of funds under management is expected to grow further post listing.
Dr Vladimir Nedeljkovic, Head of ETFs and Index Products at Absa Capital, said that the eRAFI™ methodology is groundbreaking in South Africa. It is the first time an ETF will weight shares based on fundamental valuation metrics.
“By avoiding the inherent valuation bias of capitalisation weighting, eRAFI™ strategies have outperformed by more than 2.5% per annum internationally, in over 23 mature stock markets and more in emerging markets,” said Nedeljkovic.
“The problem with the 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.”
The new ETF will be compiled using the innovative eRAFITM approach to portfolio construction. The approach was pioneered by California-based Research Affiliates, which has been licensed to the Plexus group for the Pan-African region.
It will comprise of 40 shares selected using the eRAFI™ fundamental selection criteria from the JSE top 100 shares based on market capitalisation. The portfolio will be rebalanced quarterly.
Dr Prieur du Plessis, managing director of Plexus, said: “We regard our agreement with Research Affiliates not only as a coup for Plexus, but also for all South African investors.”
“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.”
With the eRAFI™ indexing method, fundamental accounting measures of company size such as sales, cash flow, book price and dividends rather than market capitalisation are used.
In addition, two screens (a quality of earnings screen and a financial distress screen) are utilised to discount weights for companies which might engage in aggressive accounting practices or may be laden with debt. The constituent weightings of the index are re-balanced on a quarterly basis.
“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,” said du Plessis.
Nedeljkovic noted that the South African market, 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.
“eRAFITM methodology 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,” said Nedeljkovic.
