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Grindrod to launch ‘smart beta’ ETFs

Dividend aristocrats and low volatility funds follow global trends.

JOHANNESBURG – Grindrod Bank will launch two “smart beta” exchange-traded funds (ETFs) in the local market amidst the success of similar strategies that have been employed internationally.

It hopes to attract at least R100 million to both the Grindrod S&P SA Low Volatility ETF and the S&P SA Dividend Aristocrats ETF within six months of its launch on April 14.

Grindrod already offers three other ETFs – a PropTrax SAPY, PropTraxTen and a PrefTrax ETF.

Smart beta themes apply investment strategies that do not use conventional market capitalisation weights in ETF products, which at times have delivered sub-optimal returns by overweighting overvalued stocks and underweighting undervalued ones.

Although smart beta themes have gained popularity internationally on the back of good returns, some commentators have indicated that these types of strategies are not without limitations.

Background

The S&P Dow Jones, the world’s biggest index provider, recently started operations in South Africa and owns the copyright to the Dividend Aristocrats strategy.

The company has also remapped the securities that trade on the JSE according to its own methodology and criteria and has created a number of new indices similar to FTSE/JSE index series.

The S&P South Africa Composite Index (which is broadly comparable to the FTSE JSE All Share index) comprise shares that meet certain market capitalisation and liquidity requirements and includes about 155 shares. This investment universe forms the basis for the creation of the smart beta indexes.

Gareth Stobie, head of capital markets at Grindrod Bank, says in the S&P SA Dividend Aristocrats ETF the smart beta strategy would involve designing an index based on companies that have got a proven ability to pay dividends and have grown their dividend stream over extended periods of time.

The South African Index is compiled on five years’ worth of back tested data. The index is equally weighted and includes 22 shares that meet the criteria, he says. (Download a list of the constituents here.)

This compares with the FTSE/JSE Divi Plus index, which according to a JSE ETF information fact sheet, represents 30 companies from the Top40 and Mid Cap 60 Indices that are expected to pay the best normal dividends over the forthcoming year.

Stobie explains its criticism would be that the latter index does not have a quality filter attached to it.

“There is no quality filter attached to the dividend yield so you are simply chasing the highest dividend yield at any particular stage without looking at the track record of the sustainability of that dividend yield.”

Companies like African Bank and JD Group were included in the FTSE/JSE Divi Plus index in recent times despite the fact that it has underperformed over the past year.

Stobie notes that the filters applied in the Dividend Aristocrats Index does not guarantee that a company that has been performing well in the past and have been included in the index may not face financial difficulty.

“That is not impossible, but with those additional filters you are that much more assured of the sustainability of the dividend stream.”

The S&P SA Low Volatility ETF tracks the performance of the 40 least volatile shares on the S&P Dow Jones Composite Index. This portfolio of shares is reweighted depending on their relative volatilities to create a low volatility index. (Download a list of the constituents here.)

Drawing from global experience a general rule of thumb suggests that if markets were to fall, a low volatility theme would normally only participate in about 40% of the market fall. In times of market rises, it would share in about 70% of the market rise, he says.

The expected total expense ratio (TER) of both ETFs is 0.45% per annum. Stobie says the product is accessible to multiple market participants, which includes the retail market, multi-managers as well as institutional investors. It is also assessing offshore interest in the products.

While there is no minimum investment amount applicable to retail investors, most investment platforms will require a minimum monthly investment of R300 or a minimum lump sum of R1 000.

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