Fresh offshore ETNs on the JSE based on global investing gurus’ strategies
In this interview, BNP Paribas and the JSE discuss their newest exchange-traded notes (ETNs) – you can learn some more details about them here. It's truly exciting to see such a selection of offshore products being made available to South African investors, because offshore exposure is very important for them. If you hold all your assets in South Africa, you are highly exposed to any risks that the South African economy faces. By investing offshore, you diversity your assets, and mitigate against this concentration risk. Since South Africa is an emerging market, it makes a lot of sense for investors to get some exposure to developed market equities and bonds, because these typically perform well during periods when emerging markets lag (as the last eighteen months have illustrated. – FD
GUGULETHU MFUPHI: And now, to pronounce the surname that Alec prepared me for since the top of this show. Steve Nawrocki, Head of Structured Equity UK for BNP Paribas Middle East & Africa, as well as Lee-Anne Parson, Director for Equity Markets at the JSE who has been there for some time now. They both join us now to discuss the BNP Paribas' new range of ETN's that has been listed on the JSE. Steve, let's start with you. Are you impressed with the pronunciation, or not?
STEVEN NAWROCKI: That wasn't too bad, thank you.
GUGULETHU MFUPHI: At least that gets Alec off my back for now. Walk us through the listing. I understand it's not your first on the JSE, but a unique offering, nonetheless.
ALEC HOGG: Yes indeed, it's not our first listing and we've partnered with the JSE on quite a few listings. This is our first ETN and we're extremely proud to bring this to the market this morning. What we're bringing is our Guru range of Equity ETN's and what they provide is access to the South African investors, access to our international equity funds, which are based on our Guru methodology.
ALEC HOGG: Lee-Anne, you missed the Presentation to Staff this morning, I see.
LEE-ANNE PARSON: I'm sure I know exactly what's involved in those presentations.
ALEC HOGG: Gugu, I was walking out of the JSE buildings where our new offices are – she's my landlord. I have to be nice – and Nicky Newton-King was doing a Presentation to Staff. When you've been there 29 years, I guess you don't have to attend staff functions.
LEE-ANNE PARSON: No, you do have to attend. There were two, so you probably didn't see me at the second one.
ALEC HOGG: It's very interesting, what you're doing on the exchange-traded funds or ETN's/ETF/s. At your breakfast this morning, you said there are now 38 ETF's and 28 ETN's.
LEE-ANNE PARSON: That's correct.
ALEC HOGG: The problem I have in this though is that you still have to pay brokerage when you buy them, so the whole idea of ETF's and ETN's is very low cost, but the brokers are charging you one-and-a-half percent to transact.
LEE-ANNE PARSON: It's still low-cost, so I think it depends on which brokers you go through. There are some really good retail brokers that have a short of fixed cost and an all-in type of fee, but if you look at the economics of the instrument it's still a low-cost simple transparent way for people to get exposure without having to go to many international markets.
ALEC HOGG: So go and buy from an online broker who charges you point-three percent, rather than maybe a full service of one-and-a-half percent.
LEE-ANNE PARSON: Not necessarily, because some of the full-service brokers have niche services that they offer and so they would offer a bit more advice. They would engage with the clients a bit more and hence, the brokerage rate might be slightly higher. However, if you know what you want, and you want to transact, chat to the broker, and figure out what works for you. It all depends on your rate.
ALEC HOGG: You don't go and buy an ETF because you're guessing. You buy it because you know.
LEE-ANNE PARSON: That's correct
ALEC HOGG: And it's all about cost. We had Magda here the other day who was telling us that she has ETF's now at point-four percent. What do you guys charge internationally on ETF's and ETN's?
STEVEN NAWROCKI: The range that we're bringing to South Africa…we're very proud to say that the ETN does not have a charge at all because the underlying investment is done in a TM Fund, which is our asset management arm in Europe. In terms of our fees, what we're bringing to the South African market is pretty much direct market access to our funds at a very low, very competitive cost. All you're paying is the total expense of the fund as if you're invested in it directly, because that fund – the asset management company – is part of our group, so that's what we're bringing.
ALEC HOGG: What do they charge?
STEVEN NAWROCKI: It depends on the funds. We're listing four ETN's. The most competitive one is the U.S. one, reflecting the fact that the U.S. market is also the most competitively priced for us in terms of hedging – that has a total expense of 75 basis points.
ALEC HOGG: And you're getting a great deal here because it's like having Warren Buffet working for you, but also a Momentum investor, as well. It was interesting that you have the deep value side, you have the growth side, and you've managed to put them together. Just explain how that works.
STEVEN NAWROCKI: Absolutely, well what we've tried to do is typically, in the ETN and ETF market, investors receive a benchmark. They're indexed on a benchmark. What we've found is that the traditional benchmarks are just based on market capitalisation weighting, which is not necessarily very interesting. In ETF's and ETN's, the investor can make a real decision on what he wants to buy. The inspiration of our product comes from (and that's why it's called Guru) the Gurus of investment you know, the 'legends' of the investment world and what they base their decisions on. We've taken three criteria, which are the basic criteria that most active managers take their decisions on, turn them into rules, and then apply those rules and create benchmarks that generate outperformance relative to the traditional benchmarks. The criterion that we use is one of profitability, so we're looking in all the shares that we can select. We're selecting the most profitable ones. At the same time, we're looking for value, so we look at the valuation of the shares. Even if it's a profitable company, you don't want to be paying too much for it. That's the wrong time to buy. We also weight a third in terms of our evaluation criteria. The third criteria we have is one we call growth and momentum. These are more market indicators where we're looking at the momentum of a share, or the analysts' revision of the growth.
ALEC HOGG: Or prospects, in other words.
STEVEN NAWROCKI: Prospects
ALEC HOGG: You have some wonderful processes you work through, you look at huge universes around the world, and it's fantastic that South Africans can now invest in that. It's been a long road for you guys, Lee-Anne, not with BNP necessarily, but in getting government to open up these opportunities.
LEE-ANNE PARSON: I think this is a testament to the really good working relationship we have with National Treasury and the SARB, and just generally making policy in South Africa to make South Africa a better investment destination not just for South African investors, but for other international investors who may use the JSE to gain exposure – African investors etcetera. Of course, it really does open up the possibilities for our local clients. They can now buy products in Rands, and gain exposure to international markets without having to go to international markets at great expense. When it's more than 18 to the Pound, it is quite difficult then. Even a percentage charge is significantly higher than what you're paying your local broker in Rands.
ALEC HOGG: And as an individual, you don't have to go and get your tax clearances anymore. You can actually just buy it on the JSE. It has however, been a long journey. When did you guys first start? You've been there for 29 years as the COO. When did you first start?
LEE-ANNE PARSON: Our first ETF was actually listed in 2002 – that's the Satrix 40, which the JSE actually did in partnership with some of our clients because there was almost a reluctance of 'first mover advantage'. People wait and see. Let's see the first one. Let's see how it goes. We therefore, had to make a decision. Often exchanges don't really get involved in listing product, but we thought that if we didn't back it and put our name behind it, it would still remain as an idea, so we brought that to the market. Really, ETN's have only really come about in 2010 when we started to see the international trends. People were saying 'the ETN provides a bit more flexible structure, you can have all these types of elements in the underlying', it doesn't have the ring-fenced assets, but it really is the bank's balance sheets that you are buying. These types of instruments are backed by BNP Paribas as a global bank, and your performance is almost guaranteed by their balance sheet, so it's an interesting way of getting exposure.
ALEC HOGG: 'Performance' meaning that they'll pay, in other words.
LEE-ANNE PARSON: Yes, they will pay the performance.
ALEC HOGG: Not 'performance' in what you're going to get as a return.
LEE-ANNE PARSON: No, absolutely, but they will pay.
GUGULETHU MFUPHI: The popularity of the international ETN's and ETF's that are listed on the exchange…
LEE-ANNE PARSON: I'd say that we've seen the trading increase quite significantly. If I just look at the market caps in ETN's since 2010, market cap growth has been 93 percent, so that's increasing all the time. The value-traded growth is up over 100 percent year-on-year and certainly, this year already we're almost at the value-traded of this year that we were at the whole of last year, so the numbers are increasing.
ALEC HOGG: So you wouldn't buy an ETN from an ABC bank in New Guinea but certainly, in the case of BNP Paribas, you'd feel that this is fine. Your balance sheet's at risk here.
STEVEN NAWROCKI: Yes, the ETN is backed by our balance sheet and our rating…we're in the top 5 rated banks in the world – A+, so from a credit point of view the investments are very sound. In addition, from a South African investor's perspective I think the fact of diversifying your holdings into international equities at the moment, is very much looked at as something they'd like to do. Specifically here, even though the product is denominated in Rand, the investment is made in hard currency so if there are any future de-valuations, you're actually benefitting from that in this investment, as well.
ALEC HOGG: That's where the 93 percent comes from. No, it's not as bad as that. Lee-Anne, what do we like in South Africa? Which of the ETN's have we bought? Given that BNP has given you the whole world as one of them, you have the U.S., Europe, and Asia as options, what do South Africans like in those areas?
LEE-ANNE PARSON: If you look… Typically tracking top 40-type shares and also, people like commodity-type stuff, exposure to some of the stuff you haven't been able to get before for example gold, platinum, and oil. Those sorts of things are actually quite interesting – the sort of commodity hedging types of capabilities and then of course, the big Europe/U.S. type benchmark indices.
ALEC HOGG: So this is going to be something special because Warren Buffett is going to help you buy American shares, and Peter Lynch and Benjamin Graham etcetera. The real gurus are therefore bringing their intellectual capital to play. You know where you're going to put your money, don't you? Asia.
GUGULETHU MFUPHI: Earlier, we were speaking to Mohammed Nalla and he said he's not too keen on Europe. Has that been a trend over the last couple of years, maybe, from the ETN's that track performance in that part of the world?
LEE-ANNE PARSON: I think it's different because we're seeing… If you look at the foreign investor portfolios, and if you look at the brokers and the analyst reports that are coming out, they are saying that there is a move back to some of the European markets because there are some returns coming back, but it's very cyclical. We've seen money coming out of the emerging markets (we are tainted by that), and then we'll see money come back in. I therefore think it depends in terms of what cycle we're in and what commodity prices are doing. Typically, though, we find there is interest anyway because people are looking for diversification in terms of their portfolios and they're looking for the international exposure. As Steve explained, this way you can get it where you don't have to worry about any Rand depreciation, going forward.