Creating a portfolio using Exchange Traded Products

1. Creating a portfolio using Exchange Traded Products Shaun van den Berg Head of Client Education Wednesday, 22nd May 2013

2. Agenda: • Introduction to Collective Investment Schemes • Introduction to ETF & ETN • Benefits of these Exchange Traded Products (ETP) • Ways you could invest through PSG Online’s platform. • How to choose an ETP • Investment strategies using ETP • Summary • Conclusion

3. Introduction to Collective Investment Schemes • Exchange control laws - Diversification • Too many funds relative to the number of listed companies • So many funds, but few of them are really different. • Real challenges to the average investor – What do you choose? • Choices in ETP much smaller (R45-bn in AUM)- More clear cut/ simpler. • Focus is shifting from selecting funds to blending funds – Diversified portfolio • Passive investment industry expected to claim a larger part of local market Source: http://www.moneyweb.co.za/moneyweb-south-africa/the-state-of-sas-unit-trust-industry

4. Why Exchange Traded Products (ETP)? Opportunity to invest in the market- Whether you want to invest in the Top 40 shares or gold, ETP offer a way to invest without having to buy individual shares, indices, or even high cost unit trust funds. Save on fees – ETP can save you money when it comes to trading fees. While some ETFs have management fees, they generally tend to be lower than unit trusts. Invest in sectors - Maybe you do not want to play the market as much as you like a particular sector. Do you think the resources shares are headed for a boom? Buy a ETF that tracks the resources index. Invest in Foreign Markets - Just like investing in a domestic market, you can buy ETFs to invest in foreign markets as well. Create an Income stream – ETFs can offer two ways to create an income stream - Dividend ETF that include dividend shares & Bond ETF which focus on assets that generate interest payments. Invest in commodities - We love to invest in commodities, but we do not like owning commodities. Who wants an oil rig on the front lawn? With commodity ETNs, you can emulate the price of oil without having to get your hands dirty. Want to invest in coal? Buy a coal ETP.

5. ETP Investment Options Exchange Traded Products (ETP) PSG Online Investment Plan R300 Monthly R1000 Lump sum PSG Online Equity Trading Account Existing Portfolio More Capital

6. Rand Cost Averaging • Investor A buys 100 shares in ABC Ltd each month, while investor B invests a regular monthly amount of R100 in the same shares: Average price per share is 100c Value of portfolio is R900 on investment of R900 Average price per share is 90.6c. Value of portfolio is R993 on investment of R900.

7. Rand Cost Averaging Process of investing a regular amount in the market over a period of time • Buy more shares when price are low • Buy less shares when the price is high

8. Introduction to Exchange Traded Products What are Exchange Traded Products? ETP Investment Options Advantages & Disadvantages

9. What are Exchange Traded Products? • Exchange traded funds (ETF) & Exchange traded notes (ETN). • First ETP - ETF - launched on JSE In 2000 • First ETN launched in 2010. • Similar to unit trusts - Invest in a basket of holdings / Cost-effective instrument • Pool investor funds / Open ended - There are no fixed amount of units in a fund. • Investments valued at prevailing market prices / Can be redeemed at any time. • ETF dividends & interest automatically reinvested. • Collective investment schemes / Bound by the regulations governing investment products Comply with a prescribed investment mandate. • ETF are passively managed - Shares in respective funds traded actively intra-day. • ETFs listed on a stock exchange / Offer the same benefits as share trading. • Investments valued at prevailing market prices / Can be redeemed at any time. • ETF designed to track a wide range of instruments • Actively managed growth portfolios • Fixed interest portfolios. • Optimum mixed asset-type portfolios.

10. What are Exchange Traded Notes? • ETNs share some characteristics with ETFs - Differ in structure. • Both have low market entry barriers • Allow you to track index-based commodity prices on the JSE. • ETNs are debt instruments & not equity instruments. • ETNs are non-interest paying debt obligations. • ETN are unsecured senior debt note issued by a bank or financial institution. • ETN 'promise' is dependent on the financial strength of its issuer (guarantor) to have the money available when the investor wishes to sell the investment - Solvency & credit rating • Investors do not own the underlying commodities, • Do not receive dividends. • Exchange traded notes are not Collective Investment Schemes. • ETN prices fluctuate with the price of the commodity or holdings they track • Redemption price is based on the underlying commodity price or share price.

11. Advantages & Disadvantages Advantages Disadvantages • Wide range of ETPs from a number of different ETP providers • Cheap & safe way to invest in local & international markets. • ETPs are regulated by the JSE • Can be bought/ sold intra-day • Actively traded - Ensures liquidity. • Low entry level investments & low cost structures. • No Securities Transfer Tax (STT) • Accessible through share trading account or Investment Plan • ETF investors receive dividends • Suitable as a DIY approach / Do not require a financial advisor. • Index trackers do better in upward trending markets. • Bottom up, actively managed stock pickers do better in sideways trending market. • Be aware of the relative costs: • Initial fees, • Annual fees, • Re-investment costs of different investment options. • Index tracked ETF extremely concentrated – e.g. Top 5 shares • Channel investments into sectors / Can speed up markets & encourage short-termism which could lead to market instability. • ETNs do not offer capital protection. • ETNs do not have any voting rights • Most ETNs do not pay dividends

12. Exchange Traded Products (ETP) List of ETF & ETN Providers List of ETPs available in South Africa Brief Descriptions

13. List of ETP Providers 40 ETFs available • ABSA Capital (15) • Deutsche Bank (5) • Investec (1) • Nedbank Capital (3) • Proptrax (2) • RMB (3) • Satrix (7) • Stanlib Collective Investments (2) 23 ETNs available • ABSA Capital (5) • Deutsche Bank (3) • Investec (3) • RMB (2) • Standard Bank (9) Note: Different ETP providers call ETP different things

14. 40 ETFs available in South Africa • Top 40 Broad Market Access (7) • JSE Sector Exposure (IND, FIN, RES) (3) • Property ETFs (3) • Bond or Fixed Interest ETFs (4) • Floating Interest Rate ETFs (2) • Style or Theme ETFs (8) • Multi-Asset or Balanced ETFs (2) • Foreign ETFs (5) • Money Market ETFs (2) • Fundamental (RAFI) ETFs (5) – Seek value • Commodity ETFs (2)

15. Top 40 Broad Market Access • Building blocks - Buy into market through any Top 40 or SWIX funds • Newfunds SWIX Top 40 ETF (Total Return) • Tracks the JSE SWIX Top 40 index • Dividends automatically reinvested quarterly for total return. • Satrix SWIX Top 40 ETF • Adjusts weighting to exclude all SA shares held by foreign investors • Reduces exposure to mining & dual listed shares.

16. Index Tracking ETFs

17. Style or Theme ETFs • Last five years - SatrixDIVI out-performed every general equity fund. • Provides access to a portfolio of 30 shares chosen by the JSE, based on projected dividend paying potential. • NewFundsEquity Momentum Fund delivered a return of 24.29% for year end February/ SatrixDIVI grew 14.31%. • Market is in a momentum phase - High PE environment / JSE driven by growth shares • Four factors contribute vast majority of excess returns: • Market itself • Value stocks • Growth stocks • Small caps.

18. 'Smart' or 'Style' ETFs

19. Balanced or Multi-Asset ETFs • Multi-asset ETP gaining popularity globally. • Aim to replicate asset allocation unit trusts / Diversify assets / Stage of life • Sophisticated proprietary research & investment expertise • Much cheaper – Multi-asset unit trusts could charge 200 - 300 bpper annum - ETFs have TERs of under 50 basis points. • South Africa only has two such ETFs – Both done well over last 12 months. • NewFunds MAPPS Growth ETF 17.67% growth • NewFunds MAPPS Protect ETF 16.22% growth. • All-equity Satrix 40 ETF 18.46% growth. • The MAPPS – Growth fund (Aggressive investor/ people accumulating wealth) • 75% in the Swix40 / 10% in government bond index (GOVI) • 10% in inflation-linked bond index (ILBI) / 5% in cash • The MAPPS – Protect portfolio (Lower risk for those closer to retirement) • 50% in bonds (15% in the GOVI / 35% in the ALBI) • 40% in the Swix40 / 10% in cash

20. MAPPS Growth & Protect ETF

21. Foreign ETPs • A number of ETFs & ETNs, listed on the JSE, track global indices, in both developed & emerging markets. • Offer direct exposure to international equity portfolios / Replicate main market indices. • Deutsche Bank - Primary issuer of the foreign ETPs on the JSE • Foreign ETFs give access to Europe, UK, US, Japan & World markets. • Foreign ETNs - DB MSCI Africa Top 50 / DB MSCI China / DB MSCI Emerging Markets • These offshore ETPs trade on the JSE in Rands, thereby providing pure “Rand hedges.” • These international ETFs are listed under the “inward listings” rules & requirements • Regarded as Rand investments • Do not affect foreign exchange allowances. • db x-trackers MSCI Japan ETF - Reflects the performance of the Japanese equity markets - Contains about 400 constituent securities

22. Foreign ETPs

23. Commodity ETPs • Top performing ETP - Standard Bank Corn-Linker ETN = 42.78% pa. • Invest in a single commodity not everyone's cup of tea • Very volatile / Really understand all the dynamics behind them. • Commodity index delivers the benefits of the asset class with less volatility. • Standard Bank Africa Commodity Basket Index - 17.53% pa to end February. • NewGold 11.98% p.a. • Basket of 7 commodities / Weighting determined by African production over last 5 years • Diversified exposure • Buying into African commodity growth story.

24. Commodity ETPs

25. Commodity ETPs NewGold Exchange Traded Fund (ETF) • Market Capitalisation: R20.46-Billion* • Physically holds gold bullion - Tracks the Rand price of gold. • NewGold issues listed instruments - Debentures. • Each debenture backed by physical gold approximately equivalent to 1/100 ounces of gold bullion • Held with a secure depository on behalf of investors. • NewGold charges annual fee of 0.4% of the value of the gold bullion held in custody - To meet operating expenses. • According to Profile Media, NewGold is one of the best performing tracker funds over 2, 3 & 5 year periods. Source: www.fundsdata.co.za

26. NewGold ETF

27. Fundamental ETF • Satrix RAFI ETF • Index weights underlying constituents using four fundamental factors – Rather than pure market capitalisation • Dividends • Cash flow • Sales • Book value • Measures the total return (TR) of the underlying index – • Combines capital performance plus the reinvestment of income • All dividends received reinvested on behalf of investors.

28. Fundamental ETF

29. Property ETFs • PropTrax Property Index Tracker SAPY ETF • South Africa's first Property Sector ETF • Replicates the price & yield performance of top 20 SA listed property funds. • Provides access to diversified real estate portfolios, with good income yields & capital stability or appreciation. • Gives investors access & exposure to the high performance real estate sector • Low entrance levels • Reasonable fees • General index stability • Ideal for novice & professional investors. • PropTrax Ten Index ETF • Invests in only the top 10 listed property shares on the JSE • Allocation equally weighted. • Highest distribution yield of all ETFs

30. Property ETFs

31. Creating a portfolio using Exchange Traded Products How to choose an ETP Investment Strategy

32. How to choose an ETP • Keep it simple – Forget fancy & complicated • Start watching how ETPs perform / Pick those ETPs with strong performance records & low fees. • Conduct your due diligence / Thoroughly analyse your research. • Put together a simple, fully diversified ETP portfolio. • Level of Assets: Viable investment choice - Minimum level of assets or market capitalisation • The smaller the ETF, the more likely it will have a limited degree of investor interest - Translates into poor liquidity & wide bid/offer spreads. • Trading Activity: Check sufficient trading volume on a daily basis • Excellent indicator of liquidity, regardless of asset class. • The higher the trading volume, the more liquid it is likely to be • Tighter bid-ask spread - Important considerations when it is time to exit the ETF • Underlying Index or Asset: Preferable to invest broad-based, widely followed index • Obscure index that has a narrow industry or geographic focus. • Market Position: First-mover advantage - Lion's share of assets • Avoid mere imitations of original • May not differentiate themselves from their rivals & attract investors' assets.

33. Core & Satellite Investment Strategy • Critical objective - Seek to achieve average return of the market (Beta) • Significant portion of investment portfolio. • Core strategy of the portfolio should be invested in Beta return products • Indices which measure the broad return of the entire market. • FTSE/JSE Top 40 index covers the major JSE shares- Market capitalisation. • Provides diversity - Different market sectors & Various geographical locations. • Most investors prefer ETP SWIX index products - Allocate constituents according to shareholder weightings on the SA share registers only - BETA benchmark. • Popular choices Satrix SWIX Top 40 ETF & STANLIB SWIX 40 ETF • Alternative - Investec SWIX Top 40 ETN - Charges no management fees (very low cost solution). • Further option - BettaBeta EWT 40 - Equally weights funds to all 40 shares • Most consistent & best performing ETP in this class for the past 2-years. Source: www.etfsa.co.za

34. Core & Satellite Investment Strategy • Satellite strategy actively seeks above market returns • Smaller portion of investment portfolio. • Diversification amongst other investment classes, sectors & assets is an important component of investment portfolio construction. • Momentum – NewFunds (Absa) Momentum Equity ETF uses a series of momentum techniques to structure a portfolio of shares benefitting from the current growth momentum in local equity markets. • Fundamentals – RAFI ETPs (Satrix RAFI, NewFunds eRAFI ETFs) select portfolios based on the past five year’s fundamental accounting valuations. • Value strategy which can be expected to deliver relatively consistent ALPHA. • Dividends – High dividend paying companies normally outperform the market over time - Satrix DIVI Plus ETF is a portfolio of 30 JSE companies with excellent dividend payment potential. Source: www.etfsa.co.za

35. Investment Strategy Satellite Alpha ETF 5% Satellite Alpha ETF 5% Core Beta ETF 75% Satellite Alpha ETF 5% Satellite Alpha ETF 5% Satellite Alpha ETF 5%

36. Core & Satellite Investment Strategy

37. Summary & Conclusion • ETFs & ETNs offer investors several advantages that give you: • More choice, • More control, and • More protection over investment portfolio. • Like all investments, the role of exchange traded product (ETP) in your overall strategy is dependent on your goals & preferences. • Trading Platform for ETPs: • PSG Online Equity Trading Account • PSG Online Investment Plan – Lump sum/ Monthly debit order • Good Luck • Happy Trading!

38. Contact Us Thank You Shaun van den Berg Shaunvdb@psg.co.za (011) 996 5254

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