HILTON TARRANT: Mike Brown is the managing director of etfSA, an online provider and comparison of exchange traded products available in the South African marketplace. Mike, you are launching a retirement annuity platform and a number of funds being launched on the back, I guess of etfSA. These are exchange traded product-based RAs, is that correct?
MIKE BROWN: That’s correct, yes. etfSA has been running a website business on ETFs, giving all the facts and performance data and all the information you need on ETFs for the last three years. Now we’ve launched a specific, separate, in fact, website specifically targeted at running portfolios using just ETFs, exchange traded products but for the purposes of retirement annuity funds.
HILTON TARRANT: The costs here, given the retirement reform currently underway by Treasury and a number of discussion papers out there and calls for comment, costs are under the spotlight. Your all-in cost and this is something that you do obviously talk about a fair amount on the website 1.35% excluding VAT per year, that’s an all-in cost, what is that 1.35% made up of?
MIKE BROWN: Well, the asset management…when we’ve outsourced the various functions in the portfolio, so the asset management has been run by Nedbank Capital and they’re amongst the top two or three people in terms of doing passive management products in South Africa and they’re quite big in this whole area. That asset management fee of 35 basis points per year and that runs all the three different portfolios, it picks up all the costs of rebalancing the portfolios, for people who sign into the portfolios all their brokerage charges, debit order costs and everything are all picked up on that 35 basis points. So that’s the one part of the fee, the second part is you have to outsource the administration of a pension fund to what’s called a 13B administrator, which is somebody who is registered with the Financial Services Board as an administrator and here we’ve got a company called Multilect, who’ve been in this business for 20-odd years or so running mainly umbrella fund administration but they then run the clients’ accounts, so if you’re doing a R300 a month debit order they’ll collect the debit order and go and invest it into the portfolio for you and send you statements and you can look up your portfolio online and you’ll get tax certificates at the end of the year and all the rest. So that’s the admin cost and the portfolio cost. Now the Treasury says that those costs should come in at less than 1% per annum. The next cost, which is 0.5% is the cost of running the business because you have to employ people, call centres and people to answer queries and to do compliance and to have a board of trustees and to be audited and to give advice because people ask advice. So we’ll do everything within 50 basis points, so the whole thing together is 1.35% and that’s what you call now in terms of the new terminology reduction and yield, in other words if you invest in this fund you never will pay more 1.35% costs over the life of the fund. That’s quite low because the reduction in yield typically in retirement funds is quite a lot above that.
HILTON TARRANT: Mike, when you were putting this together and putting together all the building blocks did you benchmark that cost? Did you look around and did you say we need to come in at under 1.5% or we need to come in at X percent?
MIKE BROWN: Yes, we got permission, we got registered with the FSB three years ago to run retirement funds and it’s taken me three years to find administrators and asset managers who will come in around the sort of costs we want. You can get any of the big platforms to administer your fund but then they want 175 basis points upfront and 1% or 2% per annum to run things and so on and so forth. You say, well, we can’t do it at that sort of cost and they say, well, don’t worry we’ll just lose those costs somewhere, you can tell people what your costs are and we said no, we want to have a full, clean, upfront cost that covers everything so that people know when they’re saving for retirement and when you’re saving for 20, 30 years low costs make a heck of a difference. So we benchmarked across the whole industry, I spoke to just about everybody in the industry, I could probably write a doctoral thesis on how to administer retirement funds and what the costs are and that’s the number we came up with. That’s as low as we can get for a startup fund but it’s very, very competitive.
HILTON TARRANT: Mike, who’s the target market here? Surely everyone in South Africa who could get an RA already has an RA?
MIKE BROWN: Well, retirement funds are quite interesting because they’re retail funds, people who have a retirement annuity fund it’s in your own name, not like a pension fund where you have a group fund where you contribute or your employer contributes to a group pension fund, a retirement annuity fund is in your own name. It’s reasonably big, there are about R400m in retirement annuity funds but that’s very small, that’s compared with trillions of rands in unit trusts. So the retirement annuity business in South Africa is relatively small mainly because retirement annuity funds have got a bad name, the performance has been very bad and the costs have been very high. So it has had a bad name, whereas the actual mechanism of a retirement annuity fund is very good and you can see from retirement fund reform that’s the way that Treasury wants to move, it wants everybody to run their own retirement fund, to have full preservation so that if you leave your employer you can transfer your money into your own retirement annuity fund but you can still make contributions to that but you can’t take any money out. In other words preservation is there until you reach retirement age at 55. Now the Treasury has made it quite attractive because they’ve said 15% of your salary can go into a retirement annuity fund and that will rise to 27% of your salary from the 2015 fiscal year. So they’re making it very attractive and there are all sorts of other elements within a retirement annuity fund, the portfolio can be rebalanced without capital gains tax and there are all sorts of advantages in terms of your beneficiaries because your retirement annuity fund doesn’t enter your estate so you can pass on your retirement annuity to your beneficiaries without any estate duty and so on. So the retirement annuity structure or the things behind the product are quite good. We think that by coming up with a really good product – and we think this is one of the better products around – at reasonable costs and so on we will be able to penetrate into that retail market.
HILTON TARRANT: What about marketing and distribution? Presumably if you get costs this low you’re obviously taking out a portion of costs that some of the bigger existing, more entrenched players do spend on rather lavish TV ads and billboards and all sorts of thing?
MIKE BROWN: Ja, unfortunately that’s one of the issues, I can’t go to the people who are in my fund and say I’m going to spend a couple of million rand financing the Lions rugby club or team or some other lost cause because we won’t have that sort of money. We’re always saying we’re going to cap our total expenses at 50 basis points over and above what we’re paying for admin and for asset management. So we’ll always be a little bit behind the curve in terms of being able to do distribution but we’re finding more and more people are buying products online. Internationally – and South Africa is a bit behind the curve here – but 70% of all retail products, including retirement products, in America go online, go direct. Only 30% is going through brokers and intermediaries and all the rest, and it’s starting to move that way in South Africa as well. So if your product is simple enough and if you go to our website you’ll see that everything is out there, we’re completely transparent, we tell you exactly what the portfolios are, every single component of the portfolios, how they performed, what the risk is, what the standard deviation is, all the rules of the fund and the disability benefits and all this, you can read everything up. There’s nothing there that you’ve got to say, well, I don’t know what’s going on because everything is there. So it’s completely visible and it’s quite possible for people to go and just do it themselves. So if they do need financial advice, well, we’ll pay a trading commission to financial advisors who are registered on the platform but there’s no upfront commissions or any of these other things and there’s no performance fees and there’s no kick-backs and claw-backs to financial advisors, it’s just a straight trading fee and you have to approve that fee and the maxium we’ve set that at is 1% per annum.
HILTON TARRANT: Mike, if we look at the three funds how do the three differ?
MIKE BROWN: Well, there’s a CPI plus three, which is a sort of low risk fund for somebody who’s probably getting relatively close to retirement, CPI plus five and CPI plus seven. We use purely ETFs in that so the CPI plus three I think has got nine different ETFs and the CPI plus seven has 13 different ETFs and across all different asset classes. So it meets the Regulation 28 requirements and so on in terms of the asset allocation. But what’s been very interesting because everybody says you can’t get CPI plus seven in South Africa, well, if you look at the history on our fact sheets – and this is really historical, we’ve had to go back ten years, Nedbank’s had to do that – that CPI plus seven portfolio has given you 17.5% per annum and the target would be 13% CPI plus seven. Now nobody is getting 17.5% per annum, even if you have a 1% cost in there you’re still getting 16.5% per annum. Now that’s a very, very good return and you can do that because of the low risk and the bigger consistency of performance that you get out of ETFs and, of course, the low cost. In fact, that you’re getting the benchmark without it being eroded by high costs. So we think the product is very competitive and we think when people go and look at it and they come to our seminars and hear about it we think it’s certainly one of the options out there that perhaps should be considered by people. Let’s face it, you have to have some additional savings for your retirement, you can’t just purely rely on your pension fund that your employers set up for you.
HILTON TARRANT: You are running a seminar next week here in Johannesburg, where…?
MIKE BROWN: On August 21, which is next Wednesday, it’s at Nedbank head office, corner of Rivonia Road and Fredman Drive. No cost or no charge but if you want to come just get onto our website and you can sign up electronically on that, we just need to know you’re coming so that we can arrange parking for you and give you tea and a biscuit or something like that, so have some catering. So the website is www.etfsara.co.za and all the details of the seminar are on that. Ja, we’d welcome as many people who want to some along and hear about it, we’d like to see you.
HILTON TARRANT: Mike Brown, the managing director of etfSA.