/ 7 September 2005

Affordable offshore investing

For Deutsche Bank and the JSE, the launch of Itrix, their range of international exchange traded funds (ETFs), could not have come at a better time amid fierce public debate on fund management fees.

An ETF is a basket of shares that passively tracks an underlying index and is itself listed on a stock exchange. The major selling point is that the costs of investing in an ETF are substantially lower than actively managed funds.

South Africans will be most familiar with Satrix, which is a local ETF range that tracks three indices, namely the Top 40 Index (Satrix 40), the Financial Index (Satrix Fini) and the Industrial Index (Satrix Indi).

According to Deutsche Bank, on average an active fund charges 1,62% a year (ignoring upfront fees and commissions, which can be as high as 5%), while an EFT on average costs only 0,43% a year and the only upfront fees are brokerage charges.

A recent report issued by Deutsche analyst Roland Rousseau shows that over a period of 20 years an active fund manager would have to outperform the index by 58% just to cover its costs. And then there is the performance.

According to Mike Brown, manager of Satrix securities, just 13 out of 46 general equity unit trusts surveyed in the Association of Collective Investments annual unit trust survey last year outperformed the FTSE/JSE All Share Index.

Internationally ETFs are big business, with 390 ETFs with 490 listings on 31 exchanges worldwide. Internationally 40% to 50% of all institutional assets are in index or passive portfolios.

However, despite the obvious cost benefits, South Africans have not embraced local ETFs to the degree that international investors have — although the momentum is picking up with R6-billion invested to date.

The obvious benefits of Itrix — offshore exposure at low costs without utilising your foreign investment allowance — will no doubt further highlight ETFs as an investment vehicle.

The two Itrix securities that have been launched will track the FTSE 100 and Eurostoxx 50 respectively, giving South Africans international exposure without having to access their R750 000 foreign investment allowance.

The South African Reserve Bank has confirmed that individual investors can trade Itrix without exchange-control restrictions as an Itrix ETF is viewed as a bundle of inward listed companies. In terms of exchange control relaxations announced by Finance Minister Trevor Manuel last year, individuals may invest in foreign companies listed on the JSE without exchange control limitations.

However, this is not available to trusts or companies so individuals will have to invest in their own names. Institutional investors in Itrix will also still be subject to exchange controls, which cap their offshore investments to between 15% and 20% of their retail assets.

Public offering of Itrix shares

Itrix FTSE 100 tracks the top 100 shares listed on the London Stock Exchange and includes companies such as BP, HSBC, Vodafone, Shell and GlaxoSmithKline. Itrix Eurostoxx 50 tracks the 50 largest shares in Europe and includes ABN Amro, Bayer and Deutsche Bank.

They are traded like normal shares on the JSE in real time and you can invest through a stock broker. Brokerage fees range from 0,5% to 1,25%.

Investors will receive dividends from companies in the two indices twice a year.

Future listings of Itrix securities include major United States indices and Eastern indices.

There is an annual management fee ranging from 0,2% to 1%, depending on the amount invested.

There is an initial public offering, which opens on September 19 and closes on September 30, with a minimum investment of R10 000 and no brokerage fees will be applied.

The price will be determined by the value of the index on the day of listing (October 6).

Both shares will trade at 1/10 000th of the underlying index level. At current exchange rates and index levels the Itrix FTSE 100 should trade at just more than R6 a share and the Itrix Eurostoxx 50 at just less than R3 a share.