For years, former economist and stockbroker Mike Brown struggled to get South Africans interested in supporting Satrix’s offer to “own the market” through tracker funds. Brown left Satrix, but remained committed to the investment idea by creating ETFSA, an online portal focused on ETFs.  Satrix, meanwhile, is now wholly-owned by Sanlam, which has provided the country’s ETF pioneer the financial support to take it to scalability. Part of the strategy has been to expand Satrix’s offering into new areas. I caught up with Candice Paine for news on the expanded Satrix suite which now encompasses more than a dozen funds. – AH
ALEC HOGG: Candice Paine is with us in the studio. Satrix has been around a long time, Candice. I can remember – it must be a decade ago – saying to people who didn’t have much understanding about investments… When they asked what they should invest in: ‘just go with the Satrix 40’. They’ve all been very happy. It has performed incredibly well. Where did it all start?
CANDICE PAINE: It started over ten years ago with Satrix launching the first ETF in the market – the first exchange traded fund. Initially, it was a joint venture between Sanlam and Deutsche Bank. They each owned 50 percent. In the recent past, Sanlam bought the 50 percent it didn’t own and started launching unit trusts and expanding the product range. As you said, people who went into the Satrix 40 were very happy, but now we have a whole bunch of more exciting products as well for people to choose from, and different vehicles in which they can access it.
ALEC HOGG: You said ETF’s and then unit trusts were launched. What’s the difference between the two?
CANDICE PAINE: ETF is your exchange traded fund, which is essentially a share that trades on the JSE. In order to access that, people need a stockbroker. I’m sure that many of your listeners are familiar with a unit trust fund. It’s a pooled portfolio, which groups the underlying investors and people can access that directly through the management company. It’s the same underlying investment – just two different vehicles to access it.
ALEC HOGG: So with one, you can trade on the JSE and with the other, you can’t.
CANDICE PAINE: Yes.
ALEC HOGG: You started off with the Satrix 40 and it has expanded since then, particularly in the last couple of years. When exactly was that decision made to go from that base to include things like Smart Beta, which we’ll talk about in a moment?
CANDICE PAINE: About three or four years ago, we started analysing the trend offshore, the growth in passive investments, and where offshore investors were putting their money. We realised there was a lot more demand for that in South Africa and yet, people didn’t have access to the products that they wanted. There were very specific niche products in the ETF space. For example, things that tracked the resources index, the financial index, and the industrial index but that’s not necessarily what the ‘man in the street investor’ wants. He wants a well-diversified, broad-based portfolio. That’s when we started looking at the entire product range to expand it specifically to accommodate South African savers.
ALEC HOGG: You didn’t mention the ‘DIVI’ (the dividend index). There was a lot of talk about that when it arrived. It hasn’t been the greatest performer, but then I suppose it depends on what you know or what you want when you’re making those investments.
CANDICE PAINE: The dividend index is approximately about four years old and it did do exceptionally well, outperforming the All Share for the first three years. In the last year, with the markets being a little bit iffy, and there’ve been different drivers, we haven’t seen the DIVI performing as well. People going into that fund are particularly looking for a high dividend yield and that’s what the index searches for – it looks for a forward dividend yield, it sorts on those shares in the JSE and that’s what’s included in the index. It particularly suits people who are looking at retirement, looking for extra income yield or somebody who wants a tax efficient vehicle.
ALEC HOGG: Okay, I think most people know about the Satrix 40. That’s the flagship fund and a big chunk of whatever you put into your long-term investments. You’d be happy to leave even half of it there. However, you then have these ‘specialist funds’. You did mention the industrial: the INDI, the FINI, the DIVI and the RESI.
CANDICE PAINE: Yes.
ALEC HOGG: Who would go into those funds – resources, industrials, financials, and dividends?
CANDICE PAINE: Specifically, institutional or professional portfolio managers tend to use those funds because they are exchange traded funds and generally, people who want to ‘up’ that sort of sector exposure in their portfolio go into those.
ALEC HOGG: So they play through the stock market.
CANDICE PAINE: They do. Absolutely.
ALEC HOGG:Â Now you have a whole bunch of other funds that Satrix has brought out, different to the old Satrix that many people know.
CANDICE PAINE: Yes, we do and the ones that you’re talking about are our multi asset class funds. What I mean by that is the funds, basically, mimic balanced funds in the industry. There’s a low equity fund and there’s a balanced fund. Within those portfolios, they house each of the asset classes available on the JSE as well as offshore exposure.
ALEC HOGG: Just explain that.
CANDICE PAINE: For example, in the Satrix Balanced Index Fund, we hold 55 percent in South African equities. We hold a portion in South African bonds, cash, property, and then international exposure as well. They’re Regulation 28 compliant, so they’re perfect for retirement fund investments
ALEC HOGG: What’s Regulation 28?
CANDICE PAINE: Regulation 28 is part of the Pension Fund Act. What the Government actually said is that they want to limit the equity exposure for the monies that people are saving for pension. There’s a maximum of 75 percent equity in that exposure, so if you’re saving into your pension fund you can only hold a maximum of 75 percent in equity, and then they limit the other asset classes as well. It really is to promote diversification and allow a certain amount of protection within those investments because it for people’s retirement.
ALEC HOGG: So Regulation 28 funds as you’ve described them are those you could put your retirement annuities and your pension money into it, and get the tax benefits?
CANDICE PAINE: Absolutely. Yes.
ALEC HOGG:Â What about the other Smart Beta Funds?
CANDICE PAINE: Maybe I could just explain the term ‘Smart Beta’. Beta is the exposure that you have if you’re going into the stock market. If you’re investing in the JSE All Share you are getting what is called Beta. If you want to diversify away from that exposure, you’re looking at changing the actual underlying index that you’re investing in. So the simplest way of explaining that is your Satrix Equally Weighted Top 40 index. We have an ALSI 40 tracker that just tracks the ALSI 40. The Equally Weighted Top 40 Fund has reallocated the top 40, so it’s equally weighted. Of the 40 shares, each one is represented by two-and-a-half percent in the index. It changes your performance journey over time.
ALEC HOGG: Dramatically.
CANDICE PAINE: It does. It brings down the resource weighting dramatically because you’re lowering those top one/two/three stocks and it gives the bottom ones a bigger voice in the index.
ALEC HOGG: In the Satrix 40, what percentage would be Resources?
CANDICE PAINE: Absolutely. So the resources have about 25 percent in your top 40 and your industrials are round about 55 percent. Financial are at about 20 percent. In the Equally Weighted, you’re bring on that resources exposure quite dramatically to around 20 percent and you’re rating the financials slightly within that top 40.
ALEC HOGG: So if you think that the resources have had their run…if you think that they could be in for a tough time, you go for the Equally Weighted.
CANDICE PAINE: Yes, and that’s exactly the thing with the Smart Beta portfolio. It really depends on your view on the market. If you don’t have a view on the market and you just want to capture the economic growth of the South African market, you’d go for your market cap weighted index. If you have a specific view and you want some sort of sector or factor exposure, you’d start looking at the Smart Beta portfolios because they’re tilted towards those specific factors or sectors.
ALEC HOGG: Candice, you have more than a dozen funds in Satrix. Which of have we not touched on yet?
CANDICE PAINE: One of the ones we haven’t touched on specifically is your Satrix RAFI 40 index and the Satrix Momentum portfolio. Those two are once again, are Smart Beta portfolios because we’re not tracking a market cap weighted index. We’re looking at those two indices differently. For example, the Momentum Fund is quite interesting. In the South African market, most of the active managers are value managers and that’s because it makes sense. Sometimes, you’re in a Momentum market – and potentially, we’re not in one at the moment – where you want more growth factors in your portfolio. What the Momentum portfolio does is it searches on price momentum and earnings momentum.So stocks that have traditionally done well in the very recent past…it’s expected that they’ll keep doing well and those are included in your Momentum index.
It probably is a much more volatile index compared to the All Share, but it’s giving you a very different exposure again, and that is your growth exposure.
ALEC HOGG: And if the market is favouring growth stocks of Momentum stocks, that’s where you should be putting your money. If the market is not in that frame of mind…if Mr Market is maybe a little more sensible?
CANDICE PAINE: Then you probably want to be in the normal value stocks, yes. Absolutely.
ALEC HOGG: What about offshore?
CANDICE PAINE: We do have an offshore product. It’s a market cap weighted one, so it’s not one of the Smart Beta ones. It tracks the MSCI Index, and that is a 100 percent offshore, Dollar denominated portfolio – straightforward index tracker.
ALEC HOGG: But if I recall, the good thing about that is you don’t have to get your approval from SARS, etcetera. You can invest in Rands.
CANDICE PAINE: Absolutely. There are two ways, in which you can invest in that. In South African Rands, your money goes in, in Rands. You get the benefit of the offshore growth and the currency movement. However, when you exit the Fund your money is paid back to you in Rands. Alternatively, if you have gone through the SARS process of taking your maximum of R4m offshore, you can go into MSCI tracker in Dollars offshore and then your money is completely offshore, to be paid back to you in your bank account offshore.
ALEC HOGG: We’ve covered a lot of ground in ten minutes and it’s very difficult to unpack the whole portfolio. If you just gave us an indication of the money, that Satrix manages… How is that divided up? Where is most of it and which are the other funds that are worthy of mention in that context?
CANDICE PAINE: Interestingly enough, most of the money is in the Satrix ALSI Index Fund. I think that’s the most popular one, as we spoke about, and the one that the people understand the most. It’s also the oldest fund, which means that most of the money would be there. We’re rather 50/50 with regard to retail and institutional money. The institutional money seems to go into specific factor/sector exposure and then, the two multi-asset class funds that I spoke about – the balanced index fund and the low equity index fund – are really gaining traction, as people want a diversified portfolio that is still low cost, and tracks the index.
ALEC HOGG: You also have the offshore fund that you’ve spoken about, which is no doubt, with the Rand’s turbulence going to be growing in popularity, too.
CANDICE PAINE: Yes. Unfortunately, it’s probably going to be growing right now as the Rand falls, but yes, that is growing in popularity.
