Hot buy: new property ETF- STANProp

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28 Feb 2013

As part of the asset manager’s long term strategy to cover all asset classes in low cost index products, STANLIB has listed a new and third South African property Exchange Traded Fund (ETF), STANProp.

Jordaan says in 2013 returns are expected to be more subdued than they have been in recent years, therefore an ETF is the ideal means of exposure, rather than directly investing in listed property stocks.

The ETF will track the performance of the FTSE / Johannesburg Stock Exchange (JSE) South African Listed Property Index, explains Len Jordaan, head of ETFs at STANLIB.

The other two property ETFs are PropTrax and PropTrax 10 both managed by Grindrod Bank.

STANLIB already offers a SWIX (Shareholder-Weighted Index) and Top 40 ETF. 

To illustrate how this works, Jordaan says the normal Top40 index uses the market capitalisation of the underlying companies to determine their weights in the index.

This market capitalisation includes all of the shares of the company regardless of where they are listed, for example, some companies are listed in the London Stock Exchange and on the JSE.

So the Top40 includes both listings in determining the appropriate market capitalisation.

“The SWIX methodology was developed to reflect the market capitalisation of a company that is held by South African investors, so it only considers those shares that are listed on the JSE and are held by locals.”

This typically reduces the market capitalisation of dual-listed shares and these two methods invest in exactly the same shares, but hold different quantities of each share, he says.

“Property is an entirely different asset class, and should be managed as such, which is why a specialist ETF makes sense in this current market”, say Jordaan.

What is an ETF?

Jordaan explains that an ETF is a fund that tracks a particular index.

Len Jordaan, head of ETFs at STANLIB says the STANProp ETF is expected to appeal to the more cost-conscious investor who considers the ETF to be an asset-allocation tool in a multi-asset class portfolio.

STANProp invests all of its assets in the companies that make up the FTSE/JSE SA Listed Property Index and in this way replicates the price and yield performance of the index.

The index is made up of the largest 21 property companies listed on the JSE, he says.

On the other hand, he says a normal listed property fund is a fund that invests directly into properties.

Jordaan points out that while in the past it was lumped with other listed equities - property behaves very differently from company shares becoming a distinct and popular asset class with capital and income-generating attributes.

Listed property has had a strong run to date – the best performing asset class in 2012.

He says in 2013 returns are expected to be more subdued than they have been in recent years, therefore an ETF is the ideal means of exposure, rather than directly investing in listed property stocks.

“While investors want to retain their property exposure, they are now more cost sensitive, especially considering the more muted outlook for 2013.

“The Property ETF will provide property exposure at lower costs,” says Jordaan. 

ETF versus listed property

Jordaan says the ETF will give an investor the performance of listed property.

Essentially, the ETF is a fund that buys listed property, so investors in the ETF get exposure to the returns that listed property gives.

Investors can buy listed property directly, but then they have to decide exactly which shares to buy and understand each company individually.

“Our ETF buys 21 of the biggest property shares without analysing the fundamentals of each share, and therefore gives broad exposure to the property sector.”

He says it is also a very efficient method of gaining access to listed property for the following reasons:

1. It is a very simple method of buying exposure to an entire property market as the ETF holds 21 different property shares, this obviously has the benefit of diversification for the investor.

2. The ETF discloses the companies that it holds as well as the number of shares per company and this makes the investment very transparent.

3. STANLIB only charges 15 basis points (0.15 percent) as an asset management fee and so this makes the ETF very cost-efficient.

In a recent statement, Mike Brown, managing director of etf.SA.co.za, says the latest Quarterly Unit Trust Survey, which despite its name, also includes ETFs in its performance data, indicate that ETFs, either provided the best performing fund, or at least the runner-up in all periods from 1 year to 7 years, for the period ended December 2012.

Also, should an investor buy the property shares directly, they will pay 0.25 percent in Securities Transfer Tax (STT),  a purchase of the ETF is exempt from STT making the ETF very cost efficient to trade.

He points out that STANLIB has proven expertise in the index tracking industry with over 10 years of track record in equity index tracking.

“This launch is our first venture in other asset-classes, with hopefully more to come.”

It has already accumulated R50 million in assets, giving the Fund economies of scale from which to build.

“In reaching a critical mass, we envisage costs will be further reduced as their proportion against total AUM diminishes.”

Buying ETFs

From as little as R300 per month, you can start making money from this ETF.

Jordaan says investors are able to buy ETFs through any stockbroker or through platforms such as Exchange Traded Fund SA, an internet based information and transaction website for ETFs.

He says the minimum investment amount is usually R300 per month or R1 000 for lump sums.

Investors will also be able to earn income distributions paid out quarterly.

The website is a minefield of information from explaining what an ETF is to a step-by-step guide on how to start investing in ETFs.

In a recent statement, Mike Brown, managing director of etf.SA.co.za, says the latest Quarterly Unit Trust Survey, which despite its name, also includes ETFs in its performance data, indicate that ETFs, either provided the best performing fund, or at least the runner-up in all periods from 1 year to 7 years, for the period ended December 2012.

ETF management fees

Jordaan explains that the fee structure of the ETF will comprise an asset management fee of 15 basis points, plus costs, making it a very competitive offering.

Jordaan says investors are able to buy ETFs through any stockbroker or through platforms such as Exchange Traded Fund SA, an internet based information and transaction website for ETFs.

This means STANLIB will charge 0.15 percent to manage the fund. Other costs include:

1. JSE Index License Fee – 0.03 percent

2. JSE Listing Fee – 0.01 percent

3. Administration Fee – 0.03 percent

4. Trading costs and taxes – these are incurred in the fund when the fund manager rebalances the portfolio (at least four times a year).

It is not possible to predict in advance what these costs will be.

On STANLIB specifically, he says they will be able to publish a Total Expense Ratio after nine months of operation.

While actively managed funds may outperform their benchmark from time to time, they have higher fees than passive funds.

“This ETF is expected to appeal to the more cost-conscious investor who considers the ETF to be an asset-allocation tool in a multi-asset class portfolio.”

Jordaan says actively managed funds are compared with the market when determining how well they have performed.

The index is a reflection of the market, so the FTSE/ JSE SA Listed Property index is the benchmark used to evaluate the performance of active property managers.

“Our ETF replicates this index and so, investors in the fund will never receive a return in excess of what the index provides.”

Active managers try to outperform the index by buying shares in different weightings to the index; underweighting those that they think will perform poorly, and overweighting those that they think will perform well.

Sometimes active managers get their active calls right, in which case they will outperform the index. Sometimes they will get their calls wrong and will underperform the index, says Jordaan.

However, he says, regardless of whether they outperform or underperform, active managers will charge investors for the work involved in managing the fund.

The fees for active managers are typically higher than for index managers.

Investors must therefore decide whether the additional fees charged by active managers are compensated for with higher returns.

Furthermore, he says they consider this ETF to complement their existing equity ETFs.

“The superb performance of property in 2012 has highlighted the fact that listed property should be managed as a distinct asset class, separate from listed equities, however, the lower expected property return over the coming year, highlights the importance of managing the cost of investments.”

Jordaan adds that this ETF gives investors the ability to gain access to listed property as a very low cost. – Denise Mhlanga

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