Orapa – Last Friday Absa Capital made another bold move in the exchange traded fund (ETF) space when it listed NewGold Platinum, or NewPlat, on the JSE. NewPlat is the first local ETF backed by physical platinum and only the second domestic commodity ETF after its own NewGold product.
Most investors will be familiar with the NewGold story. Since listing in 2004, it has grown into the biggest ETF in South Africa with assets of over R20bn, and over that time it has given annual returns of better than 20.0%.
Now Investors will be hoping that its platinum counterpart can provide something similar.
“We’ll have to see whether NewPlat can match NewGold,” says Dr. Vladimir Nedeljkovic from Absa’s Corporate and Investment Banking division, “but I certainly think it is going to be popular. In the first two days of being listed we saw R2bn in inflows, and I think we can still expect to see more demand.”
Why a platinum ETF?
Absa’s decision to list a platinum-backed ETF is interesting in a number of respects, not least because they already offer a platinum exchange-traded note (NewWave Platinum ETN). However, there are a number of important differences between the two.
“The most important distinction is that the South African Reserve Bank (SARB) has given approval for the ETF to be considered a domestic asset,” Nedeljkovic explains. “With the ETN, however, investors still have to use their foreign allowance. So, particularly for institutional investors, this allows them to free up their offshore allocation.”
To facilitate this Absa has announced that it will allow investors to switch out of the NewWave Platinum ETN into the NewPlat ETF for a negligible fee of just 0.01%.
“The second difference between the ETN and the ETF is that NewPlat is backed by physical platinum, so you are not running any credit risk. People are not necessarily wary of the credit risk as such, but if people buy a note from Absa they are affecting the limit they have on South African banks. Many institutions invest in corporate paper (bonds), so if they invest large quantities in our ETNs as well, this could fill their allocations. Offering the ETF frees those up as well.”
These two factors combined have created an instant demand for the product. Many investors are already taking the option to switch.
“There are quite a few people in the process of switching,” Nedeljkovic says. “It does take time to move the funds, but we are seeing investors moving out of platinum ETNs and investing in our ETF. We are also talking to local institutional investors about transferring funds from international platinum ETFs into NewPlat.”
In addition, NewPlat has seen interest from international investors attracted by the promise of an annual fee of 0.4%. This makes the product amongst the least expensive physical platinum-backed ETFs in the world.
“Generally international fees are between 49 and 60 basis points,” Nedeljkovic says. “So this product is quite competitive. Basically we replicated the structure we had with NewGold, where the fees are 40 basis points.”
By comparison, the biggest ETF in the world backed by physical platinum is the ETFS Physical Platinum Shares. That has a total expense ratio of 0.6% per annum.
What about retail investors?
For retail investors looking at NewPlat, there are a few things they will need to consider. The first is what the ETF offers in terms of diversifying a portfolio.
Platinum has historically shown a low to negative correlation with equity and fixed-income securities. This makes it a good tool to smooth out movements in those asset classes.
As a precious metal it also acts as inflation protection in a global environment where central banks are printing money just about as fast as they can get the paper into the presses. Hard assets like gold or platinum are widely being touted as prudent investments under these conditions.
The price of platinum is however more volatile than gold and, because of its industrial uses, is more cyclical. Some investors will therefore prefer using it within a broader commodity allocation.
Gold has however had a rocky start to 2013 and many analysts are predicting that platinum will be a better place to be this year. This is because of more consistent demand for the metal as the automotive industry continues to recover, jewellery demand grows and, in a sort of self-fulfilling prophecy, investment interest continues to flourish.
Deutsche Bank recently predicted that as much as 21% of the total demand for platinum in 2013 will come from ETFs.
There are also severe supply issues in the industry. South Africa accounts for more than 70% of global platinum output, and local labour issues and electricity problems are well known to local investors. Anything that results in even a small drop in output from South Africa could create an immediate shortage of the metal and send prices upwards.
Issues in South Africa last year caused the platinum market to drip from a state of oversupply in 2011 to a deficit in 2012. This is likely to continue in 2013.
Another major consideration for investors is choosing between a direct investment in platinum or buying shares in platinum stocks such as AngloAmerican Platinum, Impala Platinum or Lonmin.
“Retail investors are really going to pay attention to the relative performance of platinum versus platinum stocks,” says Nedeljkovic. “Over the last few years the metal has outperformed the stocks, and that is a potential attraction for them to look at the ETF.”
On 30 April 2008 the price of platinum was $1 575 per ounce. Now, five years later, it is trading around $1 500 an ounce. It has been pretty volatile in between, but this represents an overall drop of around 5.0% in the price.
By comparison, the shares all three of the big platinum producers are trading at levels around two thirds lower than they were five years ago.
Of course a substantial rise in platinum prices will also boost platinum miners, but there still remain many uncertainties in the industry that will continue to make investors wary of these companies. And those same uncertainties may even continue to push up the price of the metal.
Although platinum is the most well-known of the platinum group metals (PGMs), many analysts are actually more excited about the investment prospects for palladium. Russia is the biggest producer of this metal and its stockpiles are reportedly almost exhausted. This, together with the fact that more industrial applications are replacing platinum with the cheaper palladium, means that the supply-demand balance seems to be swinging very much towards producers. This could see notable price increases.
South African investors already have access to a palladium ETN offered by Standard Bank, but is there a chance we might see a palladium-backed ETF on the JSE?
“It is something we are looking into,” Nedeljkovic says. “There is huge investor demand for it. But the issue is really whether we can source the metal, make the market efficiently and make spreads that are competitive. The products themselves are relatively simple, but the issue is sourcing the metal in sufficient quantities to to make it investor friendly.”
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