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A socially responsible index tracker

07 September 2007 Gareth Stokes

As South Africa embarks on its second decade of democratic rule, big business is making steady gains in ensuring their businesses reflect society as a whole. The problem is some businesses are slower to transform than others. A quick glance at the Empower

Management is at pains to maximise shareholder wealth and often views the cost associated with implementing BEE solutions as excessive and unaffordable. In truth, apart from it being a legislative requirement, BEE compliance makes sense in light of expanded business opportunities going forward.

The conundrum solved it makes sense for South African business to embrace BEE requirements and implement them as part of their strategy to maximise growth in coming years. Businesses have a legal obligation to trend toward the BEE targets legislated for their respective industries, while government should appreciate that in the long term these legislated targets will be naturally met and exceeded.

A socially responsible index tracker

On Wednesday, 5 September 2007, FAnews Online attended the launch of South Africa's first investment mechanism that recognises BEE compliance. ABSA Capital and Vunani Capital announced an innovative Exchange Traded Fund (ETF) known as NewSa, which forms part of the NewFunds Collective Investment Scheme. Investors will be able to purchase units in NewSA from 19 September.

The product gives ordinary South Africans the opportunity to support companies which are embracing transformation. By purchasing shares in NewSA they gain exposure to a basket of shares weighted in favour of companies that are doing their part to reflect the new South Africa.

"I am extremely proud of the NewSA ETF, which captures our belief in transformation as an essential driver of growth, as well as our ability to help effect transformation through financial innovation," said John Vitalo, CEO of Absa Capital. Vitalo hopes that funds of this type will prove popular, sending a message to corporate South Africa that the public supports empowerment and is voting with their investment capital.

Empowerment scoring based on seven pillars

The first challenge facing the NewSA ETF was to determine how to rank companies based on their BEE track records. This problem was addressed by referencing Empowerdex ratings. Companies receive empowerment scores based on the extent of their compliance in seven broad categories. A maximum of 20% is awarded for meeting targets in the areas of ownership, skills development and preferential procurement. A further 10% is up for grabs in the areas of management, employment equity, enterprise development and socio-economic development.

The empowerment score is a function of the above criteria and is calculated using the Codes of Good Practice on Broad Based Black Economic Empowerment, as published by the DTI, and stipulated in the Black Economic Empowerment Act.

Investment will drive economic growth

South Africa needs investment to drive growth. While foreign direct investment and flows of international capital are important for economic prosperity, the local stock market cannot be ignored. Thousands of ordinary South African's store wealth in the JSE through their participation in pension schemes and other financial products.

Ethan Dube, CEO of Vunani Group says: "We believe in the prosperity of the new South Africa and want to endorse initiatives that enable the development of the country. By supporting companies that are represented in the NewSA Index, the fund directly enables investors to endorse the country's growth." He also believes that the NewSA fund provides an interesting alternative for investors with a socially responsible investment outlook.

South African companies will not grow without complying with BEE directives, nor will South African investors reap full reward if locally listed companies fail to realise this. The sooner BEE transcends the legislative environment and is naturally entrenched in society, the better.

Editor's thoughts:
An Exchange Traded Fund (ETF) is also referred to as an Index Trackers as it provides an efficient mechanism for investors to gain exposure to a particular index. At present, local investors can purchase units in the Satrix 40 ETF which provides exposure to the Top 40 shares. Each share is weighted according to the company's free float on the JSE. Now investors have an opportunity to invest in the NewSA ETF which weights the Top 40 shares by the level of BEE compliance achieved. If you had to advise a client to choose either the Satrix 40 ETF or the NewSA ETF, which fund would get your vote? Send your answer to



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