Gareth Stobie: Why Fintech and passive investing go hand in hand

Investing in Exchange Traded Funds (ETFs) has become a fast growing phenomenon in South Africa, with a range of product offerings emerging in recent years. One company trying to make passive investing more popular is CoreShares, which has just launched a new online tool that makes it easier to purchase a range of ETFs in a single transaction or on a recurring basis. The system also caters for tax-free savings accounts. In this interview with Gareth Stobie, the managing director of CoreShares, he outlines why Fintech and passive investing go hand in hand. As your everyday investors become more cognisant of products and their costs, automating the buying process and making it easy to use is also fast becoming the next evolution in this space. Stobie also explains how the e-commerce experience, found in other consumer-facing online stores, further inspired the creation of CoreShares’ latest platform. Take a listen. – Gareth van Zyl

This special podcast is brought to you by CoreShares. My name is Gareth van Zyl, the Deputy Managing Editor of BizNews.com and today I’m speaking to Gareth Stobie, the Managing Director of CoreShares. CoreShares has just launched its new online investment platform called CoreShares Online. Gareth, thanks for speaking to me today. I hope that you’re doing well.

Yes, thanks Gareth.

Great, can you tell me a little bit more about this new online application that CoreShares has just launched into the market

Gareth Stobie, CoreShares

Sure, so Gareth, CoreShares is a fairly well-known brand now within the local exchange traded funds market. We have ten different ETFs trading on the Johannesburg Stock Exchange and our products include those, I suppose best known by the market such as the CoreShares S&P 500 ETF, which we listed late last year. Some of our other more popular products are dividend Aristocrats ETF and our two property ETFs, but we have ten in total. These are low-cost ETFs that trade on the Johannesburg Stock Exchange and what we’ve done now is build an online tool, which allows investors who perhaps don’t have a stockbroking account or aren’t familiar with investing on the JSE a direct means to invest in these ETF products online in the comfort of their home.

They just simply move through an online process and acquire the ETFs through a fairly simple platform. Previously, if the client contacted us and they wanted to buy our ETFs we would generally refer them to one of our very capable partners, if you will, so other online stockbrokers or other digital platforms that are already servicing those customers, which is not to say that those stakeholders in our business aren’t still important. They are still very important, but we just thought that this would complement our business quite nicely if we had an additional tool to offer the investors where they could just simply interact with our brand directly.

Right, so it becomes like an additional channel in a way?

Correct.

And how does it work? Once you’ve logged in, what are the options that are presented to you? Are there any requirements on the end user side, maybe you can just give us a little bit more information there?

Sure. We modelled the platform on best practice in various e-commerce sites, looking at the various examples of some of the platforms that are already out there, some of the other online shopping services, Gareth, that you may use on an everyday basis and sort of try to look at those and say, what really works and what are customers looking for. Things like ease of use came up top of mind. The one challenge for any product provider and the financial services space is that term called FICA. Everyone knows that to open an account with any financial services provider you have to have your FICA documents in place, your ID, your proof of address and your proof of bank account and so forth. We spent quite a lot of time making sure that that process in particular was as smooth and as hassle free as possible.

Read also: Gareth Stobie: Disruptive Smart Beta – ‘slowly’ eating active managers lunch

We’ve got that process, we think really waxed, well certainly on a relative basis pretty painless. We’ve put a lot of time into making sure that when you became a client of the online system that FICA wasn’t a major hack. The FICA process in particular is pretty slick and that might seem like an arbitrary bit of detail for some, but you’ll note that when you go to many service providers, it’s the FICA process that tends to hold up the process and can cause a bit of a pain in the neck.

So here, that’s online, it’s quite a bit of actual real-time, not all of it, but a lot of it is actually real-time, but aside from that, you create a username, a password like you do with most online applications or e-commerce sites. Once you’re through to the actual application and you sign that you’d agreed to the T’s & C’s then you are presented with a very straightforward user-face that you can then engage with and in that user-face, we’ve really tried to dumb it down and make it very easy for first time investors to understand. So, big bullet point, how much have I invested, into which product, and what has my return been since investing. It’s quite simple terminology, very simple communication to make sure that we’re not losing an investor along the way.

This online platform, it’s mainly a desktop platform at this stage?

We don’t have an app, but it is mobile enabled, which means that if you’re accessing the website via your phone, it should scale nicely and you’ll be able to use it quite simply on your phone too.

Okay, great and just a question around fees, this is always quite a big topic with ETFs. Once you’re in this platform, what kind of fees can end users expect to pay by using this system of yours? I guess it varies maybe from ETF to ETF, for example. If you can maybe just explain that to us.

Each of the ETFs that CoreShares manages has its own cost structure, so at an ETF level or at a product level, the fees range between our cheapest product, which is 20 basis points and our most expensive product has a management fee of 50 basis points. That’s the range of fees that there are at a product level. In terms of actually using the online application or the platform, that has a cost too. I should point out that CoreShares doesn’t make any revenue off the platform.

All that we do is recoup the cost for running the platform. If you want to invest, say R10 000, you would pay 30 basis points or 0.3% on that R10 000 per year for utilising the platform and then whatever the product cost is on top of that. So, if you invested in the Top 50 ETF then that would be a further 20 basis points per annum. So it would be in total, 0.5% and then to actually buy the ETF or sell the ETF is the catch maybe, you’ve got a stockbroking fee of 0.1%, which is usually a stockbroking fee that only very large institutions would be able to access. If you were to open up a normal stockbroking account in your own name, you’d be paying much more brokerage than that.

CoreShares

Recently your company launched the first S&P 500 ETF on the JSE. Your company’s also saying that any person can now invest in this ETF for as little as R250. Thus far, what has the uptake been of this ETF? Can you maybe give us a little bit more information about that?

We listed that ETF in November last year. We’re very proud of that achievement because it is the first S&P 500 ETF to trade on the Johannesburg Stock Exchange. There are many other S&P 500 ETFs which trade on other exchanges around the world, but this is a market first for South Africa and really, if you look at index investing generally speaking, the S&P 500 Index is an iconic index within that context, the index sort of almost gave birth to the idea of index fund investing, the first index fund every put together was the S&P 500 product. So, we’re particularly proud of it, it gives you broad exposure to the US market and we listed that product in November.

Since November we’ve raised about R320m in the product over five months or so and we have over 3 000 investors making up that R300m, so we’ve had quite a broad buy-in to the product, the ETF trades around R2m per day and that’s generally made up of 30 to 40 clients trading in the ETF during any given day, so it’s doing really nicely. From a performance perspective, since November we’ve had our dear friend, Mr Trump come into power and the market actually liked that, so the S&P 500 has done quite nicely over that time and more recently because of our political woes, our Rand has also just recently weakened, so both of those factors played into the return profile of that particular product.

Where this platform becomes relevant is that ETF has a share price of roughly 30 bucks.

One can now literally buy ten of those via the platform. You could buy ten shares, it’s going to cost you R300, and you’d be able to do that on a recurring basis using the platform. You don’t have to have a sophisticated (technical) stockbroking account and you don’t have to be experienced in terms of investing on the stock exchange to access that particular strategy, so we’ve really made it available to the everyday investor. We’re not trying to be overly sophisticated with this offering at all.

There are obviously lots of people in South Africa who have more technical approaches to investing, they have their own stockbroking account, maybe they’ve even got their own personal stockbroker who helps them with their daily decisions, and in which case this business product may not be for them. This is really for people who perhaps find the stock market a bit intimidating, they may even find the average online stockbroking service intimidating. This really dumbs it down and makes ETFs available to that type of user.

Okay, so just on that point, what is your take on the state of passive investing in South Africa right now? Do you see a greater adoption of it down the line; do you think people are becoming more aware of it?

I think the level of awareness towards the passive has never been better in South Africa. I think if you just look at the media as a starting point, Gareth, the coverage on BizNews alone and some of the comments that we see on your website and other similar websites that track the savings environments in South Africa, there’s a lot of general interest and awareness around index funds and ETF in particular and there’s a thirst for knowledge and there’s an interest to get involved and start using it as part of one’s savings. ETFs are particularly useful for people who, what we call sort of self-directed investors, investors who have done their own reading and kind of want to empower themselves, they’re particularly good for those types of investors because they are easy to understand.

There’s lots of literature around and there’s lots of transparency around them, they’re low cost, they’re pro the consumer and so forth. So at a retail client level, there is a lot of demand. In terms of actual market share, that tells a slightly different story. In South Africa our savings market, our investment market is still dominated by the very large active houses and old life insurers, the Old Mutuals, the Sanlam’s, the Allan Gray’s, the Coronation’s of this world, still dominates from a market share perspective, but very much in the intermediated space, so where advisors have given advice on investment and typically plug people’s savings into traditional unit trusts. We’re not rubbishing that part of the market. It certainly has a place, and a lot of our market is built on that, but what we are saying is that here’s a different way of going about things and that’s hopefully sort of very hassle free, easy to understand and so forth.

I guess in many ways you’re almost part of that same wave of companies such as 10x and even maybe Sygnia, who have highlighted lower fees etc. and more of the Fintech aspect of trading.

Well, the two go hand in hand, Fintech and passive go hand in hand. If you think about it, if you are going to provide some sort of digital tool to help someone with their savings, it makes a lot more sense using index funds than it would an active fund because you know what an index fund is going to give you, you know how it’s put together, how it’s calibrated, so the software and the thing that you’re building in a digital space can sort of plug into that so much more readily. So, if you take it, many of the savings Fintech vehicles around the world, they’re generally using passive as their mainstay in terms of how they’re putting investment propositions together. For sure, Sygnia, 10x are competitors of ours in a sense, slightly different propositions to us, but yes, I think there are a number of role players in the South African industry that are seeing this as a way of the future.

Just looking a little bit closer to home, to South Africa, it’s obviously been quite an interesting year politically and it’s had a spill over onto the markets. Have you seen, perhaps an uptick in demand on your side from people who are maybe looking to buy and S&P 500 ETF for example, because the political situation is a bit concerning and unpredictable? Maybe with people trying to get into international markets more through your company to try and limit their local exposure. Is that something that you’ve perhaps observed?

It is something that we observed. Across our ETF product set, we have different investment strategies, different asset classes that will perform differently at different times in the market, so our two most recent ETFs is our global property ETF and our S&P 500 ETF, both do well if the South African currency does poorly, as an example. So, if you wanted to be tactical and try and make certain positions in your portfolio or perhaps just invest in the market, then yes you can use those tools tactically to take advantage of a situation like that. Within the local market we also offer a spectrum of risks from preference shares, which are quite a defensive asset class that give you lots of cash flow through to general equity products like our top 50 index, which will just give you plain vanilla equity and then we have property as well.

So, you could structure your portfolio in a way that you think best to the market environment and it can be quite tactical if you wanted to be. If I was giving advice to someone who was new to all of this, I would keep defaulting back to that wise adage to say that, “Diversification is your only free lunch in the market”. While the Rand may seem like it’s on a one-way bet at certain times, given our political woes, just be cautious of throwing everything at that, because we saw what happened last year after the Rand spiked all the way up to R16, it came all the way back down to nearly R12 and now it’s weakened to above R13, so currency is a very difficult thing to make predictions on and so too are most markets.

Therefore, our best advice to investors would be to diversify across a couple of different strategies bearing in mind that if within an index, you at least get very broad company diversification. So, like the S&P 500, you’re getting exposure across 500 different companies, you’re not making specific company bets, likewise with our top 50 index, invest across 50 different companies, you’re not taking company bets there either, but across our product set, you can also invest across different asset classes and across different markets. There are different types of diversification too.

Just a quick question about the future of your business, are you looking to bring on more Fintech tools, more online tools, and maybe even a few apps?

The short answer is yes, in terms of this online tool, you’ll see, Gareth, that it doesn’t provide investors with advice per se, so once you’re onto the platform, the investor still has to kind of know what they’re looking for in terms of which products they would like to buy. We provide plenty of reading and some guidance in that regard, but we don’t give actual advice in terms of saying, “Well, we think you need to have R10 000 in this product or R20 000 in that product”, so there’s no advice overlay.

If a client’s looking for advice, we would generally refer them to one of our trusted suppliers, someone like EtfSA for instance, or some of the other stockbrokers that we do a lot of work with. We are however, working with another brand that has a very strong retail presence, which is looking at a major Fintech project that’s also looking to utilise passive. We’re not at liberty to give further detail on that just yet, but that’s around the corner and watch this space in terms of that.

Okay and just as a last question, obviously people can log onto your online system today and check it out. What’s the exact web address again?

The online tool’s just been simply added to our company website, so it’s coreshares.co.za and off the main landing page you’ll see there’s a little button that prompts you to have a look at the new online tool and then as I say, it’s a very simple signup process from then on, online FICA, online mandates that you would need to sign and then from there you move through to the investment platform.

Great, Gareth thanks a lot for speaking to me today. It’s been a great pleasure, thanks for telling us about your new product as well.

Excellent, thank you Gareth.

Great, thank you very much.

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