- Gain for investors
- eRAFI™ ETFs far outperform their benchmarks
Absa Capital, the investment banking division of the Absa Group Ltd (Absa), announced today that as from June 1, it will slash the basic management fee on its eRAFI™ series of Exchange Traded Funds (ETFs) that weight shares based on fundamental valuation metrics.
The basic fee currently charged is on average 75-80 basis points per annum depending on the portfolio and the investor holdings. It will be replaced with a basic fee on a cost recovery basis taking into account only the direct operational costs of the eRAFI™ ETFs. This will result in an immediate saving for the investors of 20-25 basis points (0.20-0.25%) per annum.
These savings will further increase with the increase in the size of the eRAFI™ portfolios.
The current performance fee of 20% of the amount by which the eRAFI™ ETFs out-perform their benchmarks will remain unchanged. If in any year an eRAFI™ ETF doesn’t outperform its benchmark, investors will ‘claw back’ returns and only pay a performance fee after they have made up the underperformance.
Dr Vladimir Nedeljkovic, Head of ETFs and Index Products at Absa Capital, said: “We don’t believe investors should ever pay for anything other than out-performance and for direct costs for running the funds.”
“We are confident that the eRAFI™ will deliver superior returns so we are putting our money where our mouth is and basing our fees on superior returns.”
According to Nedeljkovic, since the launch of eRAFI™ Overall ETF in June 2008 and the subsequent three Sector eRAFI™ ETFs in June 2009, institutional and private investors have poured about R209m into the eRAFI™ ETFs, because of their superior stock weighing methodology that has seen them deliver better returns than traditional market capitalisation ETFs – and with lower volatility.
The eRAFI™ indices tracked by eRAFI™ ETFs are compiled using the innovative enhanced Research Affiliates Fundamental Index™ (eRAFI™) approach to portfolio construction pioneered by California-based Research Affiliates.
“The problem with market capitalisation method of indexing is that it overweights stocks that are overvalued and underweights stocks that are undervalued, the opposite of good investment practice,” said Nedeljkovic.
The eRAFI™ ETF methodology weights shares based on fundamental valuation metrics - sales, cash flow, book price and dividends - rather than market capitalisation.
The eRAFI™ Overall SA ETF has outperformed its benchmark JSE All Share Index by 11.92% on an annualised basis since inception in June 2008. Since their inception in June 2009, Sector eRAFI™ indices – Industrial 25, Financial 15 and Resources 20 outperformed their respective benchmarks by 4.53%, 4.82% and 6.71% on an annualised basis.
Internationally, RAFI™ strategies have outperformed cap-weighted index strategies by more than 2.5% per annum in over 23 mature stock markets, and significantly more in emerging markets over extended measurement periods, noted Nedeljkovic.
In the US domestic markets, for example, RAFI™ strategies outperformed cap-weighted index portfolios, both large and small stocks, by just over 200 basis points (2%) per year with slightly lower volatility.
Furthermore, across international markets RAFI™ portfolios outperformed cap-weighted index portfolios by an average of 557 basis points (5.57%) per annum, also with slightly lower volatility.
Absa Capital, together with local investment manager Plexus Asset Management, exclusively manage the eRAFI™ ETF in South Africa.
“The eRAFI™ methodology provides all the benefits of traditional market capitalisation-weighted indices, including diversification, liquidity, low turnover and competitive fees, while generating incrementally higher returns with lower volatility,” said Nedeljkovic.
ENDS…Notes to editor:
Exchange traded funds are open-ended collective investment schemes that are listed on a stock exchange and can be traded at any time during the day. Absa Capital is a leading originator of ETFs in the South African market.
The eRAFI™ Overall ETF comprises of 40 shares selected using the RAFI™ fundamental selection criteria from the JSE top 100 shares based on market capitalisation and the portfolio will be rebalanced quarterly.
In addition, three other eRAFI™ ETFs are offered: eRAFI™ Financial 15, eRAFI™ Industrial 25 and eRAFI™ Resource 25, tracking the respective FTSE/JSE sector indices.
The ‘e’ in eRAFI™ stands for enhanced. The eRAFI™ ETFs are rebalanced quarterly as opposed to the Satrix RAFI 40 ETF which is rebalanced annually. The eRAFI™ indices are price indices meaning that all dividends are paid out by the portfolio on a quarterly basis. An investor has the option each quarter to receive dividends or alternatively they can re-invest these dividends back into the ETF. The Satrix RAFI 40 ETF is a total return index meaning that all dividends are automatically re-invested into the index.
The eRAFI™ ETFs have two additional screening criteria (debt coverage ratio and net operating assets) that are utilised to discount the original fundamental score/weight that was obtained applying the four factors (revenue, cash flow, book to equity and dividend). These are used to reduce weightings of companies in the index which engage in aggressive accounting practices or may be laden with debt.etf.absacapital.comIssued by:
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