Plexus introduces RAFI Methodolgy to unit trusts

Plexus Asset Management, a leading South African niche investment manager renowned for its innovative investment solutions, has just announced the launch of a new unit trust fund, the Plexus RAFI^TM Enhanced SA Strategy Fund.

This cutting-edge investment solution has been made possible as a result of a licensing agreement concluded between the Plexus group and Research Affiliates, a California-based investment house.

Dr Prieur du Plessis, managing director of Plexus, says: In terms of the agreement Plexus has obtained the exclusive right to manage and distribute products utilising the so-called enhanced Research Affiliates Fundamental Indexing^TM (RAFI^TM)  methodology in the Pan-African region. I believe RAFI^TM is a concept that will help shape the global investment landscape for years to come.

The Plexus RAFI^TM Enhanced SA Strategy Fund will consist of approximately 40 shares selected from the top 100 companies by market capitalisation listed on the JSE. The selection of shares included in the fund will be made using Research Affiliates unique approach to portfolio construction. The strategy involves the selection of equities based on weights determined by using financial metrics of company size (sales, cash flow, book price and dividends) as opposed to traditional market capitalisation weighting. Further enhancement is then attained through the incorporation of additional factors such as quality of earnings and a financial distress screen, hence the enhanced RAFI^TM  methodology.

The  RAFI^TM methodology has won widespread acceptance in the US and internationally. According to Robert Arnott, founder and chairman of Research Affiliates, market cap-weighted indices such as the FTSE/JSE indices, suffer from an inherent flaw as they overweight all overvalued stocks and underweight all undervalued stocks. However, research has shown that by avoiding this inherent valuation bias, the  RAFI^TM strategies have outperformed cap-weighted indices by more than 2,5% per annum internationally (considering 23 mature stock markets), and significantly more in emerging markets, over extended measurement periods.

The Plexus RAFI^TM Enhanced SA Strategy Fund is classified as a domestic general equity fund and the performance benchmark is the FTSE/JSE All Share Index. The minimum investment amounts are R5 000 lump sum and R300 per month.

There is no initial administration fee, but an intermediary may charge a client up to 3,0% (excluding VAT). The annual management fee is 1,0% (excluding VAT) for smaller investors, and 0,85% (excluding VAT) for clients with a minimum investment amount of R1 million. A performance fee of 20% of the outperformance above the funds benchmark is also charged. 

According to Arnott,  RAFI portfolios seek to protect investors against market bubbles and fads because a shares weighting in a RAFI portfolio is immune to pricing errors. You can have exuberance in a companys share price but not in a companys financial metrics.  RAFI portfolios thus avoid the huge run-ups and subsequent corrections that have historically plagued cap-weighted indices.

Portfolios constructed by means of the RAFI methodology furthermore provide benefits such as diversification, liquidity and low turnover, while seeking to generate incrementally higher returns than comparable cap-weighted indices with lower volatility.

Du Plessis said: The agreement between Plexus and Research Affiliates is a coup for us in that we are joining forces with a world-class international partner in an area that is bound to become increasingly popular over the next few years, especially as investors focus more strongly on optimising risk/return parameters at affordable fees.

The new Plexus RAFI^TM Enhanced SA Strategy Fund should add considerable value to any conventional portfolio otherwise comprising active equity managers and passive index trackers, and should seriously be considered by both individual and institutional investors. Plans are also afoot to list an exchange-traded fund (ETF), utilising the enhanced RAFI methodology, on the JSE within the next few months.