South African investors were recently introduced to a new type of investment, the actively managed exchange traded fund, or AMETF. Although these funds have existed for some time on overseas markets, recent changes in financial regulations now allow for them to be traded on the JSE.

Traditional exchange traded funds (ETFs) have been around for over 20 years and are one of the two predominant types of collective investments governed by the Collective Investment Schemes Control Act (Cisca), the other being unit trust funds.

Both enable investors to buy units in a pooled investment. The prices of units must accurately reflect the value of the underlying assets in the fund. They must also both be “open-ended”, meaning there is a theoretically unlimited number of units available, unlike a company share, which is limited to the number of shares issued. And the units must be liquid, so that you can redeem your investment for cash without having to hang around waiting for a buyer.

The Cisca provisions essentially ensure that, as an investor, you can buy and sell units whenever you want to at a price that reflects their net asset value (NAV). This is, again, unlike buying shares in companies, where the share price has a life of its own and may not reflect the value of the company’s assets.

ETFs vs unit trusts

The major differences for investors in the structures of ETFs versus unit trust funds are:

Unit trust funds: you buy units directly from the fund, and the NAV is calculated at the end of each trading day according to the closing prices of the underlying securities.
ETFs: you buy and sell units on an exchange in the same way as you buy and sell shares, via a stock broker or share trading platform, with pricing on a real-time basis.

Up until now, unlike unit trusts, which can be either actively managed or passively track an index, ETFs, according to the JSE’s rules, could only track an index or, as in a gold ETF, the market price of a commodity. (“Tracking an index” means holding the underlying securities of an index in the same proportions as the index, with the result that the performance of the ETF matches that of the index.)

The new AMETFs, under the changed rules, can be as flexible as unit trusts in the composition of the underlying investment portfolio, with fund managers able to actively buy and sell underlying securities according to a less restrictive investment mandate.

‘Total solution’

The first AMETF to list on the JSE is the Coreshares by 10X Income AMETF. In a recent radio interview on Michael Avery’s Classic Business show, Chris Rule, head of client solutions at 10X, said this new type of investment offered the best of both worlds: the flexibility of a unit trust fund combined with the affordability and flexibility of an ETF.

“Investors in traditional index-tracking ETFs looked for exposure to a particular market. For example, for US equities you would buy a tracker of the S&P 500 Index. In other words, you would buy individual asset-class building blocks and the onus would be on you to put together a solution to target your particular outcome. Under the new AMETF legislation, we can design portfolios with a less restrictive mandate. Practically that means, in the context of the Coreshares by 10X Income AMETF, we can now put together the total solution. In this instance we have a multi-asset income fund that targets a particular outcome and invests across a broad spectrum of asset classes to achieve that outcome,” Rule said.

“This is not new – you’ve been able to buy this type of fund as a unit trust for many years. But it’s the low-cost nature of ETFs and the on-screen accessibility alongside, let’s say, your share portfolio, that is revolutionary about this product,” he said.

Disruptive effect

Michael Jordaan, ex-head of FNB and now heading various disruptive ventures in the financial services space, including Bank Zero, has gone as far as to say that AMETFs will eventually replace unit trusts as the preferred type of collective investment for retail investors.

But other industry leaders are not so sure, and are more of the opinion that the two will come to exist side by side, as passively managed unit trusts and traditional ETFs have come to do.

Anet Ahern, chief executive of PSG Asset Management, the reigning Raging Bull Awards South African Manager of the Year, said the fact that AMETFs can be easily traded may prove disadvantageous to investors. “Due to being listed alongside shares, investors may be tempted to trade them more frequently. This is not generally the intention of collective investment schemes and equity portfolios. We firmly believe that a long-term approach is essential when it comes to growing wealth, and that there is little evidence of the average investor being able to add value through trading funds. In fact, more often value is destroyed through poor investor behaviour and emotional portfolio actions.”

Ahern also said that the addition is likely to add to the complexity of the investment universe, “especially in the absence of good advice and an overall plan. (AMETFs) will not be any simpler than ETFs or unit trusts to understand”.

* Hesse is the former editor of Personal Finance

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