After the shocking details Pension Funds Adjudicator Vuyani Ngalwana brought to light on the hefty sales commissions and administration fees pocketed by assurers, you would have thought South Africans had learnt to avoid middlemen and invest directly in the stock market by now.
Yet there are only about 200 000 South Africans who buy shares, Standard Bank head of online trading Richard Seddon says. In contrast to Australia, where about half of all share trades are done by that country’s 5,7-million individual investors, on the JSE more than 90% of trades are still done by institutions.
Market research by Standard Bank on why South Africans shy away from the stock exchange elicited responses such as: “It is too expensive. It’s too risky. You need lots of money.”
Two recent revolutions in investing will hopefully encourage South Africans to invest directly rather than via endowment policies or unit trusts. The first is online trading, and the second is exchange traded funds (ETFs) — specifically Satrix Top 40.
Satrix Top 40 is similar to a unit trust. But rather than some highly paid wunderkind picking what’s hot, the Satrix Top 40 basket of shares comprises the JSE’s 40 largest companies by market capitalisation according to the FTSE/JSE Top 40 index. At the time of writing, the Top 40 index was 17 542 and Satrix Top 40s sold for R17,62 — its share price is roughly a thousandth of the index.
After plowing my way through the current edition of Benjamin Graham’s 1949 classic The Intelligent Investor, said to be Warren Buffet’s bible, I can summarise this hefty tome as follows: if you are too lazy to study five years’ worth of annual reports and Sens announcements, buy nothing but your local stock exchange’s top-market-cap-index ETF. And even if you find analysing financial reports fascinating, buy little besides this ETF. The updated commentary on Graham’s original text cites various studies showing while fund managers might beat these top-market-cap indices in the short term, in the long-haul top- market cap ETFs always win. If they don’t win, the research costs of the funds that beat them were not factored in properly.
Investing an affordable amount at regular intervals is one of the soundest investment strategies, according to Graham. Over time, you build up a portfolio at an average price, avoiding the common pitfall of investing everything before a crash and then losing nerve and selling at the bottom.
Satrix encourages adopting this strategy with its investment plan: a stop-order from R300 a month. This has a huge advantage over endowment policies and other assurance savings products in that you are not locked in for a minimum of five years with huge surrender penalties if you fail to stay the term.
Satrix GM Mike Brown says the transaction cost is 0,35%, which includes the 0,25% uncertificated securities tax, effectively meaning buying direct from Satrix only costs 0,1% brokerage. Furthermore, the dividends Satrix Top 40 pays out from its underlying shares every quarter can be used to buy more Satrix Top 40 shares at no brokerage fee.
Once you’ve built up a sizable portfolio of Satrix Top 40 and feel it is time to diversify further, moving the shares into an online stockbroking account is cheap and easy. Brown says the Custodian Transfer Cost (CST) to move the shares charged by Satrix is R150. Standard Bank, along with most other stockbrokers, waive CST on their side to win new clients, Seddon says
There are dozens of local online brokers trying to wean South Africans off the assurance industry. Traditional stockbrokers PSG and T-Sec (among many others) are competing against a growing number of banks to offer cheaper fees and adding more functionality to their trading websites.
Absa is possibly the cheapest at the moment. It charges 0,4% brokerage and waives a R500 annual service fee to customers who do at least four share trades a year. Standard Bank’s brokerage at 0,7% is higher, but Absa’s R120 minimum brokerage versus Standard’s R89 makes Standard the lower-cost broker for trades under R17 142.
According to Seddon, Standard Bank’s www.securities.co.za beats its competitors in functionality. The bank throws in extras such as a subscription to Profile Media’s database of company statistics, and it offers free training courses to its clients.
Absa’s www.absastockbrokers.co.za has recently been revamped — a move that indicates business news sites will face increasing competition from online brokers offering news feeds to stimulate trading.
Absa’s and Standard Bank’s online broking accounts double as money market accounts. Cash left in them earns interest. This is useful for investors who want to follow Graham’s balancing strategy. Graham advised readers to decide how much risk they can stomach, and then set aside a corresponding amount of cash, say 25% of their investment. Every quarter or so, investors should check the ratio of cash to shares in their portfolio. In a bear market, the cash slice will be bigger, prompting them to buy more shares. In a bull market, it will be smaller so they should sell shares. This disciplines investors to buy low and sell high, avoiding the emotional tendency to do the opposite.
An online trading account comprising just Satrix Top 40 and cash makes it easy to follow this strategy. Most online trading accounts look similar to spreadsheets showing the percentage holdings various shares and cash. With an Absa account, if you balance your portfolio every quarter, you will do enough trades over the year to escape its R500 annual service fee.
What should your second investment after Satrix Top 40 be? My advice is Itrix DJ EURO STOXX 50 (whose share code is ITXEU), which is made up of European technology stocks such as Nokia and Siemens. Diversifying out of the JSE hedges your bets against slumps in the local economy. I prefer ITXEU to Itrix FTSE 100 (whose share code is ITXUK) because the London Stock Exchange has many of the JSE’s heavyweights such as BHP Billiton and Anglo American.
Satrix Top 40 and the two Itrixs are not the only ETFs trading on the JSE, but these three top-market-cap indices of various stock markets are all cautious investors need look at. Precious metal ETFs — locally there is just Nu-Gold where each share represents a thousandths of an ounce of gold — have become extremely popular. My first reason for not investing in these is that gold in a vault pays no dividends. Secondly, instead of diversifying over lots of industries as you do with a top market cap index ETF, Nu-Gold is a crap-shot on the gold price. The other ETFs in the Satrix family narrow the focus to industrials, financials, resources and non-resources heavyweights. Personally, I have little faith in fortune tellers so prefer to spread my bet over the lot by sticking to Satrix Top 40 with a little ITXEU on the side.
Sellers of opaque investments such as endowment policies claim they have the advantage that since people can’t check their price every few minutes on the Internet as they can with shares or unit trusts, they can’t be spooked into cutting and running during market slumps. Market corrections as we have seen over the past few weeks have forced individual investors to keep repeating the mantra: be brave, don’t cave. But if you can ride out the occasional bear market and stick to building up a solid portfolio of top-market-cap ETFs rather than what your golf buddies tip, you can’t do worse than the tales of woe recounted to Ngalwana.
Before the Internet, opening a broking account was intimidating. You had to phone a stockbroker who might laugh at your clueless choice of share and puny order value. But with online trading, only your PC knows what dumb shares you buy with how little money.