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Grindrod to offer Top 50 ETF

As it re-brands offering.

Cape Town – Grindrod Bank announced on Wednesday that it is in the process of bringing a new exchange-traded fund (ETF) to the South African market. Its Top 50 ETF will track the S&P South Africa 50 Index, which is S&P’s local large cap index.

The Top 50 is not only a larger universe than the FTSE/JSE Top 40, but also selects and weights stocks according to their free float market capitalisation rather than pure market cap. This makes it similar to the Shareholder’s Weighted (SWIX) indices run by FTSE/JSE, although its methodology does differ. It also places a 10% cap on any one stock in the index.

As with the SWIX, Naspers is currently the largest constituent of the S&P South Africa 50. However, while the SWIX weights MTN, Sasol and Standard Bank as second, third and fourth, S&P allocated those positions to SABMiller, BHP Billiton and Richemont.

As the below table shows, the S&P South Africa 50 has consistently delivered better returns than the FTSE/JSE Top 40 over the last five years, but has lagged the SWIX.

Annualised total returns of local indices to 31 March 2015

Index

1 Year

3 Years

5 Years

S&P South Africa 50

12.69%

20.13%

16.69%

FTSE/JSE Top 40

10.20%

19.30%

15.60%

FTSE/JSE Equally Weighted Top 40

9.40%

15.50%

15.00%

FTSE/JSE SWIX

15.60%

21.60%

17.80%

Source: S&P Dow Jones Indices & FTSE

Grindrod also announced that it has entered into an amalgamation agreement with Nedgroup Beta Solutions to take over management of the BettaBeta Equally Weighted Top 40 ETF and the BettaBeta Green ETF. The transaction is still awaiting regulatory approval and is reliant on a favourable unit holder ballot.

The successful conclusion of this agreement together with the launch of the Top 50 ETF would bring the number of ETFs managed by Grindrod to eight. It will also grow its assets under management from around R700 million to over R1 billion.

Grindrod’s current suite of ETFs

Fund

Index tracked

PropTrax SAPY

FTSE/JSE SA Listed Property Index

PropTrax Ten

Proptrax Top Ten Equally Weighted Listed Property Index

PreftTrax

FTSE/JSE Preference Share Index

DiviTrax

S&P South Africa Dividend Aristocrats Index

LowVolTrax

S&P South Africa Low Volatility Index

Alongside this expansion, Grindrod will also be re-branding its ETF and broader passive investment management business to CoreShares.

“The name ‘CoreShares’ is principally derived from the growing trend to structure an investment portfolio using a core-satellite approach,” says Gareth Stobie, head of the new CoreShares franchise. “In our view, index investments should form the majority – or core – of a portfolio, ensuring broad market exposure, reduced costs and lower manager risk.”

Stobie says that although their funds have primarily been used by retail investors, they are starting to see broader uptake.

“Given the listed nature of the ETFs, they are readily available to multiple types of users from retail through to institutional,” says Stobie. “In terms of our business, most of our assets so far are from the retail market, however we are starting to see increased buying from multi-managers and financial advisers.”

 

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“The Top 50 is not only a larger universe than the FTSE/JSE Top 40, but also selects and weights stocks according to their free float market capitalisation rather than pure market cap. This makes it similar to the Shareholder’s Weighted (SWIX) indices run by FTSE/JSE, although its methodology does differ.”

That is incorrect. FTSE also uses free float market cap in all its indices. The SWIX excludes foreign holdings in the calculation of market cap.

Hi serene. FTSE uses the “full market value” of companies for calculating the Top 40, not just their free float. The SWIX uses an “alternative free float”, which, as you correctly point out, ” represents the proportion of a constituent’s share capital that is held in dematerialised form and registered on the South African share register”.

Read FTSE/JSE Indices Ground rules section 6.3. It reads “The entire quoted equity capital of a constituent company is included in the calculation of its market capitalisation, subject to free float restrictions”.
6.3.1 define what Free float restrictions are.

If you don’t believe check with the JSE.

FTSE/JSE uses the Full market cap to rank shares by size for eligibility into indices, BUT uses the free float market cap for calculation of the index. Maybe that’s where you got confused.

10. Index Calculation
10.1.2 The FTSE/JSE Africa Index Series is calculated using the following formula:??????
Where,
 fi is the Investability Weighting Factor to be applied to a security to allow amendments to its weighting, expressed as a number between 0 and 1, where 1 represents a 100% free float. This factor is published by FTSE/JSE for each security in the underlying index.

Hi serene. Perhaps I should have been clearer (and, admittedly, used the right terminology). The FTSE/JSE Top 40 consists of the top 40 companies listed on the JSE based on their full market value. Free float is not a consideration when selecting what goes into the index.

As you mention, however, free float does come into the picture as a secondary consideration when weighting the index so that it is actually liquid enough to be investable.

The S&P South Africa 50, however, uses free float from the outset. In other words, it selects its constituents based on their free float market cap, not their full market value. That makes it similar to the SWIX, which uses the alternate free float from the outset as well.

I hope I’ve said it better this time?

Yet again you are wrong. The starting point of SWIX is the same as any its equivalent index. With the difference in free float weight only.

Here is the rule from the Ground rules:

Shareholder Weighted (SWIX)
Shareholder Weighted (SWIX) Indices have the same constituents as an existing market capitalisation weighted Index. However, all constituents are weighted in the SWIX indices by applying an alternate free float, called the SWIX free float. The SWIX free float represents the proportion of a constituent’s share capital that is held in dematerialised form and registered on the South African share register, maintained by Strate. The SWIX free float will not exceed the company free float.

I’m sorry, you are quite right on that point. The SWIX is only weighted differently to the Top 40 or the ALSI, but it is the same stocks.

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