Buying Global Stock Market Index with your Rand – no excon clearance required

The name of the fund is a mouthful. But that won't put off anyone looking for exposure to global stock markets and protection against a sliding Rand. Satrix's MSCI World Equity Index Feeder Fund mirrors the performance of global stock markets. And as a "feeder fund" it can be accessed in Rand – the same way you'd buy the Satrix40 or, indeed, put money into any other local savings vehicle. And as he tells us in this interview, fund manager Johann Hugo is happy to put his mother's savings into the fund. That should count for something! – AH

ALEC HOGG: This special podcast is brought to you by Satrix and it's a warm welcome to Johann Hugo who's the Fund Manager of – get this – the Satrix MSCI World Equity Index Feeder Fund. Maybe you could shorten the name, Johann.

JOHANN HUGO: When I saw the name, I thought it should be much shorter too, but it actually describes what the Fund does quite well.

ALEC HOGG: It's pretty much what it's about now. Let's maybe, just unpack the Fund first and then go into a broader concept of smart beta. This Fund gives you as a South African the ability to follow what happens in the World Equity Markets benefitting, if there is a weaker Rand, from that.

JOHANN HUGO: Yes. Maybe we should start by explaining the concept of a Feeder Fund, so that the investor understands that properly. A Feeder Fund is normally a South African-based Fund that feeds exclusively into its primary foreign-based Fund. By that, it means it also allows the investors easy access to investing in an offshore Fund as well as eliminating some of the complicated pack and other implications. The World Equity Fund is a Dollar-based Fund, so if you as an individual investor or an institution want to invest in this, you need to have Dollars. You therefore need to go through the whole process of getting SARS to okay the transaction. You need to do an asset swap and take the money out. In this Fund, you actually invest Rands into the Fund. We then exchange the Rands for Dollars and buy units in the mainframe.

ALEC HOGG: What kind of exchange rate commission do you pay? I know we have colleagues who live abroad and when we pay them at the end of the month, we're hammered by the exchange rate from time to time – the commissions that certain people charge. In your case, you have a total, if I read it correctly – your annual fee plus your manager fee of 171 basis points. That isn't a lot to cover commission and everything else.

JOHANN HUGO: The retail cost of this Fund is 50 basis points that the retail investor…that's the management fee that we charge on the Fund (and you know you need to add VAT to that). How the investment in this Fund takes place is we get the Rands today and we try and trade at the open of the market in the morning when the money comes into the Fund. I have a great example. This morning, the market Rand opened at 11.08. It closed and we managed to exchange the money at 11.07. However, if the Rand moves in the morning when the cash flow happens in this Fund, you are open to the vagaries of the exchange rate, but we are very institutional. I'm not 100 percent sure exactly what commissions we pay, but it is relative to other players. It's much lower because we do a lot of exchange trading.

ALEC HOGG: Yes, and as far as the investors are concerned there's no need to worry about that. I see my 171 basis points is obviously 150 + VAT.

JOHANN HUGO: That's right.

ALEC HOGG: The Fund seems to have done pretty well. It launched in October last year – already R215m. How are you marketing it?

JOHANN HUGO: Currently, I'm happy to say the Fund is up to R300m. It is managed…you can get it from certain lists and it's currently on four lists: Momentum, Standard, Investec, as well as on Glacier. Clients can also go directly via Radius and Sanlam Collectors Investments.

ALEC HOGG: And through the website. Can you go through the Satrix website as well?

JOHANN HUGO: Yes, you can go on the Satrix website, see the Fund there, and apply through that.

ALEC HOGG: All right, so there's no exchange control. You don't have to get your tax affairs in order to invest in this one. You get the international markets. Where exactly is the money invested? Maybe you can just unpack the MSCI World Index itself for us.

JOHANN HUGO: Yes, I think that's a very good starting point. The MSCI Index is called the MSCI World Index, so this is only investing in developed countries and currently, 23 countries are covered by this Index. It has just more than 1600 shares and we don't do a full replication in the mainframe. We optimise an optimiser, which is quite a rigorous process and a well-known optimiser that is used extensively abroad by tracker managers, especially in an Index where there are so many constituents. We currently hold between 860 and 880 shares of this total benchmark. A benchmark with so many shares had quite a long… To save costs, one tries to minimise the number of stocks you hold, while still trying to track that index at the end of the day.

ALEC HOGG: How often do you rebalance the holdings of your shares? Let's say for instance, your biggest shareholdings (the numbers I'm looking at here) at the end of August, was Apple at one-point-seven percent and then you had ExxonMobil at one-point-two percent. If those shareholding weightings were to change in the MSCI World Index in the next two weeks, would you automatically also change your holdings?

JOHANN HUGO: Yes, it's a Tracking Fund, so whenever there is big corporate action in our share… This Fund also has very regular cash flows, so at the end of the day, we optimise every second or third day. This optimiser looks at the benchmark, how it's changed and with all new cash flows – in or out flows – we try to bring this portfolio closer to the real benchmark. It's a continuous process in which we check the portfolio every day/morning that the weights relative to the benchmark don't deviate too much.

ALEC HOGG: So you really are now tracking the international indices. From the public's perspective as you've just said, it's now around R300m. At the end of August, it was R215m. Is it kind of kicking in its popularity now that the Rand is under a little bit of stress?

JOHANN HUGO: You know how these funds work. When the Rand is strong, nobody wants to invest in it and as soon as the Rand shows weakness, everybody wants exposure to a fund where you get some Rand hedge. We've been managing the Main Fund for about eight years now and over the last two to three years, we had many requests from investors to try to get exposure to a world tracker and that is one of the main reasons why we had then started the Feeder Fund.   The Feeder Fund is a better way than to invest in a Dollar-denominated fund, but what investors must remember is that you invest Rands into this fund, but at the end of the day when you disinvest, you get Rands back.

ALEC HOGG: It certainly has made it a lot easier than going through the Reserve Bank etcetera, and I guess that's starting to catch on. From the outlook for the Fund, clearly, you have to have a view as a Fund Manager on where World Equity Markets are going. If your mother came and asked you if she should be putting her money in the Fund right now, how would you respond?

JOHANN HUGO: Currently, this is a Fund as I mentioned previously, that invests in developed markets and you have the luxury as an Index Fund Manager to say 'listen, I don't take views. I don't have a view on any markets, so I disinvest in the index'. Looking from a personal perspective though, I think the U.S. market, which is about 56 percent of this total index, is at levels and the economy – if I just express a view – looks as though it's going to grow quite nicely over the next two or three years. The American Equity Market at least, has a chance of doing better than what it's currently doing. In addition, the Rand exchange rate in South Africa…we know it's a currency that weakens over time. Currently, I think the Rand exchange rate is a bit undervalued (the Rand), but over time this will definitely be one of the funds. If you want to take on a lot more risk, we also have an emerging market tracker fund, which we will also launch (Feeder Funds) probably before the end of this year or early next year. Then you can have a combination of developed and emerging markets but currently, I would definitely put my money in a world tracker because you know what you're going to get and you want some certainty. If we look at active managers abroad, they struggle to beat the indices over time, so I think it's quite a fair bet and I would definitely invest my mother's money.

ALEC HOGG: I'm sure she'd be happy with that. Johann Hugo is the Portfolio Manager of the Satrix MSCI World Equity Index Feeder Fund. As was explained during this discussion, what makes a Feeder Fund different is that you can put Rands into it. You don't need exchange control approval. You need no other approval. It's like making an investment in a bank account or indeed, into the Satrix 40 itself. This special podcast was brought to you by Satrix.