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The growth of ETFs and passive investing since 2000

‘For me, probably the biggest positive about all of this is that that access is more important than anything else’: Helena Conradie – outgoing CEO, Satrix.

SIMON BROWN: I’m chatting now with Helena Conradie, outgoing CEO of Satrix. The news hit my inbox a couple of weeks ago. I’ve got to say in one part it’s sad losing Helena – although not necessarily to the industry as a whole – but the flip side is truthfully exciting because change is exciting, change is fun. 

Helena, good morning. I appreciate the very early morning time. I want to talk about ETFs, I want to talk about your space in the industry, but I want to go all the way back initially to what you actually studied. I remember correctly, you studied with Nerina Visser way back in the day at university – not that far way back.

HELENA CONRADIE: No, just the other day. Yes, we actually both studied applied mathematics, so nothing to do with the financial markets. I actually ended up in Sanlam as a derivatives trader totally by accident because of my financial or mathematical background. I started with that and thought that this was really interesting. Then I eventually started to understand equities, did my CFA (Chartered Financial Analyst), and began to develop a passion for the markets and for the instrument it could be in people’s lives. 

SIMON BROWN: You were at Absa about 20 years ago. You joined Satrix, which was of course owned by Sanlam, about a decade ago. Did you join with the expectation and realisation that ETFs were really a game-changer for investors?

HELENA CONRADIE: Not at all. I’ve actually been involved in Satrix for 20 years because I joined Sanlam Investments as a quantitative analyst in 2000, and Sanlam Investments with the underlying asset manager for the Satrix funds. We started in 2000 with one institutional passive-enhanced index fund of R800 million – can you believe it? And then in November 2000, the first ETF was launched. So then the total portfolio grew a little bit, and today we’ve R135 billion under management and 20 ETFs. So I think it has grown a lot. But in those first days, I don’t think people really knew the difference between an EFT (electronic funds transfer) and an ETF (exchange-traded fund). A long time ago.

SIMON BROWN: We didn’t know. I had a friend in the US and we happened to be chatting and I mentioned this ‘weird thing’ coming, and I had no idea what it was. This, as you say, must’ve been November 2000. He’d been buying …… [2:50] in the US and [said] “just buy it”. He was convinced this was the future of investing, and in many ways, it has been. We’re talking ETFs – of course, there are index-tracking unit trusts as well – but 20 years later it’s almost ‘of course’. It has really fundamentally changed the industry and changed how individuals can invest and access the market.

HELENA CONRADIE: Absolutely. If I think back 20 years, I was joking the other day to say that we were not even last on the agenda. Sometimes we fell off the agenda, so that was how unimportant and not-core it was. But it also gave us an opportunity not to experiment, but to really push the boundaries. I think in terms of ETFs, but passive or index investing in general, it allowed us to investigate different areas and how they can contribute to your portfolio. 

So we’ve always had to make a very clear case why this is important, whether it’s the cost or whether it’s performance, or whether it’s just accessed in general because I think what we’ve realised over these 20 years is that these instruments, specifically ETFs, can provide you access to markets, to themes, to anything you can dream up. I think that’s the most powerful thing going forward that ETFs will contribute to this industry.

SIMON BROWN: It’s growth in the industry going forward. Is it going to be new ETFs coming out, perhaps new territories, maybe some from Asia, India, or perhaps new themes and the like? How much does that drive growth, or is it going to have perhaps more acceptance from the big institutions? I’m thinking of the pension funds and the Regulation 28 products which could so easily [accept them]. And certainly, we’ve seen it with some of the providers out there, a 10X, OUTvest, Sygnia, and others. Sanlam has products as well, where the usage of passive picks up significantly. 

HELENA CONRADIE: I think you’ve touched now on all the things that make this segment of the market so interesting because you can literally grow from providing access to different themes and countries – you mentioned India. But you can also play a role in the global ETF market, providing access to global markets, being part of these new regulatory changes. And then you can think umbrella funds and you can see a role to play there. You can see institutional investing bringing down costs in financial advisors’ portfolios. So there are endless opportunities. That’s why, if we think of the market today our book in Satrix is R135 billion and, as I said, 75% of this is institutional, although we’ve probably been better known as a retail brand. But that tells you it’s endless – the opportunities as well as what investors can gain from this. 

And last year, if you think back to Morningstar, at the beginning of this year – it feels like last year already – that was huge, not too passive and I think a sort of acknowledgment that this is a style in its own right. Investors can gain so much from having that as part of their total portfolios.

SIMON BROWN: Over the last decade we’ve certainly seen massive growth in ETFs. If we go back 10 years, I think there were six, maybe seven, from Satrix, there were the Deutsche Bank offshores. There wasn’t very much. Absa had some. We’ve seen massive growth. The tax-free [regulation] which came in when Nhlanhla Nene was finance minister in February 2015 – that’s also been a significant change or boost to the industry. It brought c. It’s given people perhaps a better understanding of long-term investing and really has been a boon.

HELENA CONRADIE: Absolutely. I think people don’t think whether it’s passive or active or whether it’s an ETF or a unit trust any more. For me probably the biggest positive about all of this is that that access is more important than anything else. So whether you access the market through whichever instrument, an ETF or unit trust, or an active manager or a passive manager, that’s almost secondary to the fact that you have access to the market. 

You will know my passion is really democratising of investing, and the fact that hurdles like minimums have been sort of flashed over the past few years as well – that’s very important. That makes it possible for people to actually own the market.

SIMON BROWN: It is that access. I bought my first Satrix 40 – I think I signed up in January 2001; maybe it was December 2000. I still have those ETFs. If my memory serves, I paid R6 for them, and now they are R60, and that excludes dividends. But back then I went with the Satrix investment plan simply because with my traditional stockbroker the maths just didn’t add up. And perhaps even the bigger one, as you say, in the last decade has been the rise of EasyEquities, which has shifted the industry. Of course, you’ve got the SatrixNOW platform, and we’re seeing others. Standard Banks has ASI (AutoShare Invest), FNB has it, Absa has it, everyone has now the sort of easier, low-minimum, easy-entry process for investing. And that’s been a massive change.

HELENA CONRADIE: A huge change. And I think retail is becoming more important. These are very interesting trends over time. Institutional has really been demanding falls over years. Think back to Charles Ellis and his Winning the Loser’s Game, that great book of his. 

Over time retail investors have been playing a bigger role. I do think that even though knowledge is so widely available – there’s a difference between knowledge and information – financial advisers will play a bigger role in the future, even though we have all these online platforms because the choices are so much greater. Although it’s easier to access the markets, the information is very intimidating. There’s too much. So now we’ve gone from too little to too much. But it’s very exciting for retail investors – and even your young kids are asking about ETFs. They ask about markets. It’s exciting. It’s very exciting.

SIMON BROWN: I remember my niece and nephew actually had a song around the one that Nerina issued from Nedbank – the equal weight. I forget the song. They were kids. They were five and seven years or something. 

The other giant thing of course has been fees. It’s not just the transaction fees, it’s the fees we pay in the funds. In a sense that war has been won. Yes, we can split hairs between 0.2 and 0.25%, but we’re splitting hairs on fractions of percentages here. 

HELENA CONRADIE: Absolutely. In 2017 we lowered our Satrix ETF to just 10 basis points or a 0.1 percentage point, and at that stage, to be honest with you, I was a little bit worried that the industry was moving too fast because you can actually get to an irresponsible way of cutting fees as well, where you put the business at risk. I was worried, but I thought, okay, in the industry there are competitors that are really putting too much pressure on this and we need to be responsible as the industry. I think that has stabilised. And, as you said, we are at the point where the investors really can’t complain. I think the industry will in a very responsible way always look at where you can bring in more efficiencies, and flow that through to the client’s benefit. 

It’s not only financial markets that are evolving, it’s also your information systems. That all adds to the fact that we can provide more efficiencies in our industry as well. 

SIMON BROWN: Absolutely. I remember when you cut that and I take the point. There is a point where you put the business at risk, but it has worked and we are sitting in an amazing space. 

We’ll leave it there. The key point is, as I said up front, it’s sad you leaving, but congrats on everything and all the best for the future. I love change – and you’re not completely gone from the industry. You’re on committees. You’ll still be on the Satrix board. 

Helena Conradie, outgoing CEO of Satrix, thanks very much for your time this morning.

Listen to Monday’s full MoneywebNOW podcast here.

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