The New Satrix RAFI 40

Satrix Managers, opened the Initial Public Offer (IPO) for the Satrix RAFI 40, the seventh of the Satrix family of Exchange Traded Funds (ETFs) listed on the JSE.

The Satrix RAFI 40 breaks new ground in a number of ways:

• It is based on the FTSE/JSE RAFI 40 index*, which is a fundamental and not a market cap-weighted index. This methodology seeks to identify, based on the average of 5 years financial accounting data, companies which are fundamentally undervalued by the market. The index selects 40 major JSE companies which are under-valued and weights them accordingly.
• It is a Total Return product – all dividends and other income received from the index constituent companies are reinvested on the date of receipt. Accordingly, investors receive both the capital and the yield of prime JSE companies. The capitalization and retention of income enables the capital value of the fund to grow more regularly over time.
• The Satrix RAFI 40 is the first registered domestic Total Return Collective Investment Scheme and ETF.

Mike Brown, General Manager of Satrix comments:

“The Satrix RAFI 40 will, by seeking undervalued companies, look to provide a “value lift” as the market is likely to re-rate the undervalued companies in the RAFI 40 in due course. Capitalising all income in a total return product will enable the capital value of the portfolio to be continually increased and retaining such income in the portfolio should enable the overall capital value of the portfolio to compound over time.”

“Satrix RAFI, by immediately investing all income, will largely eradicate the time delay between the declaration of dividends and their reinvestment. This so-called “cash-drag” is typically the main cause of tracking error in index tracking products.”

“The Satrix RAFI 40 Total Return is approved and registered by the JSE and FSB and brings the concept of domestic equity based, or total return funds, within the ambit of officially regulated funds in South Africa for both retail and institutional investors.”

Brown advises that “backtracking of the data provided by the FTSE/JSE over the past eight years, indicates that the FTSE/JSE RAFI 40 total return index has outperformed the most widely followed Top 40 index by an average of 8,3% per annum over the period July 2000 to July 2008. Even if the Top 40 index is calculated on a total return basis, the RAFI 40 still outperforms by 4,8% per annum.”

Market Cap Weighting and Fundamental Indexation

Mike Brown pointed out that “the great majority of local indices are market cap-weighted. Shares that are included in the index are based on their price performance (size) and liquidity, so market cap-weighting rewards the largest, most successful and highly traded shares in the market. It provides an ideal gauge of market momentum and enables investors to participate in the broad market movements.

However, where market cap methodology could be criticized is that it tends to overweight shares that are overvalued (with high P/E ratios) and can underweight undervalued shares (with low P/E ratios). In other words, in periods of sustainable profit growth or share price growth, pricing errors could occur in the market.

Brown says that “fundamental indexation seeks to redress the link between possible pricing errors and portfolio weighting, by largely eliminating reliance on share price and relying instead on quantitative fundamental accounting methods to pick shares that are undervalued and to weight them accordingly.”

“Fundamental indexation is an important supplement to market cap-weighting, the combination of the two in a balanced portfolio, provides the prospect of outperformance, with lower risk and volatility, over the medium to longer-term.”

RAFI 40 Methodology

FTSE/JSE uses the following criteria to assess fundamental values:

• Sales - averaged over 5 years
• Cash flow – averaged over 5 years
• Book value – at review date
• Dividends – total distributions (including special dividends) averaged over prior 5 years.

A Fundamental ratio is calculated for each company in the JSE All Share index (160 shares) for each of these four factors, a composite number is calculated from the average of each of these factors and, after taking investibility into account, a RAFI fundamental value (RFV) is calculated for each stock. The RAFI 40 index constituents are computed and weighted according to their RFV’s.

The index is reviewed and adjusted once a year (in February) and companies, whose value assessment according to the RFV methodology means they no longer qualify, will be dropped from the index and replaced by a stock that is undervalued. In this way the RAFI methodology always seeks for value offering companies. The RAFI 40 is a licensed FTSE/JSE index that is updated every 15 seconds and also offers end-of-day values.

Satrix RAFI 40 is mandated to operate with a Total Expense Ratio of 70 basis points, although this could be reduced by scrip lending. No performance fees, annual service charges or other costs will be levied by Satrix Managers.

Both price and capital data will be published by FTSE/JSE and on the Satrix website, to enable investors to calculate the income reinvested on their behalf and the adjusted base price of the Satrix RAFI 40 securities for capital gains purposes.

IPO Details

The IPO commences at 09h00 on Monday, 8^th September. Investors will need to submit applications to apply for securities in the IPO to: their stockbrokers; the participating stockbroker (Standard On-Line); or to the Satrix Investment Plan on or before noon on 6^th October 2008. Shares will be allocated on or before 13^th October and the new Satrix RAFI 40 securities will commence listing on the JSE on 16^th October 2008. Minimum subscriptions are R1000 and in multiples of R1000 thereafter.

 (Click on image to enlarge)

For more information, please contact:

Mike Brown
Tel: 011 783 1490
Cell: 082 653 5645
Email: [email protected]