Although the rand has lost a lot of ground against the US dollar over the last eighteen months, it seems that South African investors have nevertheless developed a taste for US-denominated global ETFs. According to Wehmeyer Ferreira of Deutsche Bank, money has been pouring into the Bank’s db X-tracker US Fund. In fact, since the beginning of the year, assets in the fund have grown from R300m to R1bn – eye-watering growth given the rand’s collapse. In this interview Ferreira talks about why tracker funds like these are so popular, and what’s driving investor interest in US and European stocks. He points out that most assessments of the global economy suggest that over the next few years, developed countries are going to offer the main growth opportunities. It’s likely that SA investors interest in global stocks is being driven by this fact, even though the currency moves have made global, dollar-denominated stocks less attractive. As always, offshore investing is a tricky business for South Africans, caught between the desire for growth and the volatile currency. – FD
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GUGULETHU MFUPHI: Passive investment is showing its lively side lately. That’s according to the latest performance figures from Deutsche Bank Securities. The db X-trackers products are packed particularly, causing a stir. Joining us to explain more is Wehmeyer Ferreira who is from Deutsche Bank. Wehmeyer, when we look at the lively growth that we’ve just mentioned and that you’re seeing in these db X-trackers, is that a bit surprising for you?
WEHMEYER FERREIRA: It’s not really surprising because we see growth in two buckets. We see growth of money, in-flow from new investors and then we also hope that the product would return a performance for the investor. The performance for AM growth has been twofold. We’ve seen new inflows, as well as the equity and currency market being in favour of the investor in this product.
GUGULETHU MFUPHI: Let’s touch on cost: doubtless, that’s a factor. Recently we saw Signia coming into the market offering a 0.4 percent – that’s the cost factor product – to the market. How are you hoping to compete with this?
WEHMEYER FERREIRA: Currently our cost in our country product is 75 basis points and our world product is 60 basis points. We load that in July and in the future, with the asset growth and getting a bit of scale we might load that again. How that competes with the other passive offerings…I think we can be compared to passive unit trusts. We shouldn’t be compared to passive unit trusts over local stocks, because you are comparing a local passive product over 40 stocks versus a world product over 1600 stocks, so you do get additional costs. Where our product differs from unit trusts is that you don’t have the lag of execution. You don’t have to wait for your order to be placed before 11:00 in the morning and then it’s only executed in the afternoon. The advantage is for the investor that likes to take advantage of a market being at a low level or pre some results coming out, so if you want to trade at 3:00 in the afternoon, you can trade at 3:00. If you wanted to trade at 9:00 when the JSE opens, you can trade at 9:00. It’s just offering that integral liquidity, which I think is a massive advantage over ETF trading rather than a passive unit trust.
GUGULETHU MFUPHI: You mentioned the 75 basis points with regard to your costing structures for the local offering. How do you respond to statements that Deutsche Bank is profiteering off the South African market?
WEHMEYER FERREIRA: There’s definitely – in all of these structures, – even though they’re passive – there’s a cost involved. The regulator you employ doesn’t allow you to do your own asset management, own administration, or own custody. They want you to use third party service providers because it adds credibility. In this structure, we use Bank of New York as our administrator. We use Mellon Capital as our asset manager. We use various other providers as our sponsor/custodian/trustee, so all of these costs add up into the product and that is why the full cost doesn’t go to the manager. It’s purely a function of the cost you have to outlay as well as what you refer to as what the manager keeps.
GUGULETHU MFUPHI: Let’s touch on the performance of the db X-trackers. Where are you seeing more investor attractiveness, from the retail space or institutional investors?
WEHMEYER FERREIRA: It’s always slightly difficult to measure because it trades on the JSE, so you don’t touch the client directly – necessarily. We’ve seen in the past – I think – six months from what we can gauge, we’ve seen more inflow from the private clients’ side. It’s not necessarily your traditional platform money, but rather your private client brokers and your wealth managers. We’ve also – which has been pleasing and encouraging – seen some inflows from institutional clients, both on the Pension Fund as well as the insurance’s long-term and short-term side, so I think there’s a wide spectrum of clients utilising this product.
ALEC HOGG: You people have been pretty aggressive in the offshore markets. You were the first to bring foreign shares for instance, the db X shares, onto the Johannesburg Stock Exchange. How well has that performed? How well has it been accepted?
WEHMEYER FERREIRA: On the db X-tracker, it’s a bit of a funny one because you market these products in a time when the rand/dollar is at seven and then only once it gets to nine and a half, people wake up, and start investing. It’s been coming and it’s been slow, but I think in terms of growth, the past year has definitely been the best for us. Our assets went from 2.4 billion to 4.2 currently.
ALEC HOGG: You’ve doubled in a year.
WEHMEYER FERREIRA: No, from the start of the year until now we’ve almost doubled our assets. In our US Fund, we’ve seen it grow from just over 300 million to in excess of one billion, so it’s been phenomenal growth. I think our investors, especially being wary of the South African market being overpriced – we’ve heard it all along. It’s overpriced. Its full earnings are not catching up with price, so they are looking for an additional avenue. Another thing that has been in the forefront is currency – obviously. These products offer you a perfect opportunity to take advantage of a weaker rand.
ALEC HOGG: Is this mug money that is coming in? Often we see that the small investors always buy unit trusts at the wrong time. As you were saying, they should have been buying at seven to the dollar and now they’re buying at ten to the dollar. Is it institutional? Is it smart money coming in?
WEHMEYER FERREIRA: Its smart money, but I would hope that it’s private client money on the back of advice from advisors or brokers advising them. I think it’s not necessarily taking advantage of the rand/dollar at the wrong time. It’s realising the importance of the diversification within your portfolio – realising that you need an offshore component to take advantage of a rand blowing out, to mitigate some of the – as we just earlier heard – the political and economic risks that sit in the small sphere of stocks that you can invest in locally. It just offers you a bit of extra security, if you can call it that.
GUGULETHU MFUPHI: Just very quickly: some of the commentary coming through, is that local investors want more exposure to the US market. What’s the driver behind it?
WEHMEYER FERREIRA: In the reporting season of the US that’s been going on for the past three months we’ve seen most US companies – I think 80 percent – up until October, beating on sales and revenue expectations. We’ve seen an inflated equity market across the world. We’ve seen the US running, Europe running, and South Africa running but we are seeing Europe’s earnings catching up so you’re not seeing the price as out of proportion. You are seeing the future earnings growth catching up and its promising signs for those markets. It’s been the sentiment all along, I think, since the crisis that the US would get out first. Your consumer would be better. Your consumer would feed through to your equity market and you would see the performance.
