New indices, new ETFs on the way for SA investors

S&P Dow Jones is, excitingly, set to launch some interesting new stock indices for the JSE. S&P Dow Jonez is famous for its S&P 500 index of top US stocks, and for the Dow Jones Industrial Average index of US industrial stocks. It’s now brining this indexing magic to the JSE, and planning to launch some intriguing indices including a low-volatility index and a dividend stock index. Even more excitingly, Grindrod Bank has applied to create ETFs around these new indices, which will mean some appealing new options for South African investors looking to buy the market on the cheap. According to the head of S&P Dow Jones Indices for Sub-Saharan Africa Zack Bezuidenhoudt, the new indices will also include a top 50 index and a sharia index. Now we just have to wait for the indices to launch, and the regulator to approve Grindrod Bank’s mooted ETFs. – FD

To watch this CNBC Power Lunch video click here Zack Bezuidenhoudt, Head of S&P Dow Jones Indices for Sub Saharan Africa

ALEC HOGG:   Well, the S&P Dow Jones Indices has launched nine new indices covering South Africa’s equity market.  This is spurred by the launch of the S&P South Africa Composite.  Zack Bezuidenhoudt Head of S&P Dow Jones Indices for Sub-Saharan, is with us in the studio.  Thanks for coming through, Zack.  We know S&P.  You have the S&P 500 that we quote on CNBC all day, every day.  The Dow Jones of course, is very closely related to the Dow Jones Industrial Average.  How have you been attracted now to the South African market?

ZACK BEZUIDENHOUDT:  Well, we’ve already been servicing some of the asset managers out of Dubai for the last three and a half years, and some asset managers for even longer than that.  We’re really interested in some of our Sharia indices and African indices.  Again, what we’ve found is that to be relevant in South Africa, we set up a shop last year in Melrose Arch, and we really want to bring indices that are applicable to South Africa investors.  We’ve therefore really decided to bring out the whole range of indices as an alternative to what’s available now, for them.

ALEC HOGG:   Alternative to the FTSE…


ALEC HOGG:   Are they exactly the same?

ZACK BEZUIDENHOUDT:    They’re not exactly the same.  Each index provider around the world will have different methodologies and calculations that they would do to construct an index.  Our indices will look slightly different to them, and we’re also bringing out some indices, which South Africa hasn’t seen before, from the index providers that do operate in South Africa.

ALEC HOGG:   Which ones?

ZACK BEZUIDENHOUDT:    One of those will be the low volatility index and the dividend Aristocrats index.  The low volatility index will be a 40 stock index.  What you’ll do is you’ll take what we will now call the S&P Composite index, which is the 150 stocks we’ll cover, do a volatility ranking on those securities, and really select the 40 lowest volatile stocks.  We’ll do an inverse of that volatility when we weight them in the index.  It’s an exciting index.  It reduces volatility by about 30 percent, but also increases your alpha potential above a market cap index by…in the region of four percent over the last 4/5 years – that we’ve seen.

ALEC HOGG:   So the back testing has told you this could be an index, which if there were an ETF on it, would be worth buying.

ZACK BEZUIDENHOUDT:    That’s exactly it.  The methodology is very simple.  It’s not as though you have to doubt the backdated numbers.  You really calculate the volatility, which is simple, and you do the inverse of that and select the top 40.

ALEC HOGG:   Have you had support from ETF providers to actually link exchange-rated funds to these new indices?

ZACK BEZUIDENHOUDT:    Yes, we have.  We’ve already signed a two-year exclusivity on the low volatility index, as well as the dividends Aristocrats index, with an ETF provider in South Africa.

ALEC HOGG:   With whom?

ZACK BEZUIDENHOUDT:   Grindrod Bank.  They’re currently in the process of applying for an ETF with the Regulator.

ALEC HOGG:   That’s very smart of Grindrod, to actually get together with you guys on such exciting new products.  We’ve spoken about the one – what about the second one…the dividend Aristocrats?

ZACK BEZUIDENHOUDT:    S&P, both on the volatility and the dividend indices, are quite popular globally.  On the low volatility, we have about $5 billion tracking it in global ETF’s, and on the dividend side, we have about $40 billion tracking those indices through ETF’s.  The Dividends Aristocrats index is really an index that the dividends paid out by companies in South Africa.  However, the unique thing of this, is that company needs to increase its dividend pay-outs over a five-year period, or have stable dividends over a five-year period to be included in this index.  You therefore end up with companies that are growing.  Management is good because they keep on increasing dividends and doing it on a consistent basis, so you end up with high quality good companies that keep on growing.  What you’ll see with the numbers from the index as well, is that volatility is also reduced – because those companies are more stable, but again, you benefit from the high dividends that they would pay out.

ALEC HOGG:   So the ETF’s are not yet available.

ZACK BEZUIDENHOUDT:    They’re not yet available.  It’s all dependent on how long the Regulator takes to approve those, so again, it’s something to look out for.

ALEC HOGG:   Something that I’ve often wondered about…the oldest index in South Africa: many people have forgotten about it.  People of my age recall the Rand Daily Mail, and it used to the RDM 100, which was almost like the Dow Jones Industrial average.  Would there be any way that you could resuscitate an index like that, so that it would make sense to bring it back again?

ZACK BEZUIDENHOUDT:    What we have is a very strong custom capability within S&P Dow Jones.  What we say is, it’s almost unlimited in what we can do with an index – or constructing an index – and we’ve teamed up with multiple asset managers across the world in taking ideas of indices and giving them a tool to be able to calculate that index.  If an asset manager or anybody out there has an idea about an index, S&P has the capability to make that index come alive.

ALEC HOGG:   I’ll tell you why I like it, Zack.  It’s because it goes back to the turn of the century, of the previous century, which is one of the benefits of the Dow that you can go back into the 1800’s.  The JSE’s don’t have that kind of history.  Anyway, maybe we can talk afterwards and find a way of bringing that one back to life.  I’m sure there’d be many in South Africa who would be excited to see it.

ZACK BEZUIDENHOUDT:    Yes, definitely.

ALEC HOGG:   Good luck with the launch of your new indices.  How far are you backdating that?

ZACK BEZUIDENHOUDT:    We’re taking it back five years – so, around 2008 – September.  We’ll be launching tradable indices, so we have what we call a South Africa 50 index.  We’re bringing out equally weighted 50 indices, as well as Sharia indices to the markets.  Our Composite indices will also be available in sub-sector indices, based on the GICS classifications that the large index providers use internationally, so again, making it easier for South African investors to compare sector indices to global sector indices with the same criteria.

ALEC HOGG:   Thank you, Zack.  That was Zack Bezuidenhoudt, Head of S&P Dow Jones Indices for Sub-Saharan Africa. 

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