introduction to beta strategies construction-beta strate… · 8 risk and performance risk is...
TRANSCRIPT
INTRODUCTION TO BETA STRATEGIES
14/08/2014
2
Introduction
• Investing is the trade off between risk and expectedreturn;
• In general, it is assumed that assets or Portfolios withhigher risks give a possibility of higher expectedreturns;
• Alpha Strategists (or active managers) therefore seekto provide an excess return (alpha) to the generalexpected return for the risk level of the assets beinginvested in;
• Beta Strategists (or Passive Managers) however,attempt to produce the expected return consistent withthe risk level of the assets being invested in;
• Our discussion today is around around howFund/Portfolio Managers can take advantages of thebenefits of Beta Investing in today’s world whereCapital is constantly seeking efficient utilisation.
3
The “Alpha” / “Active” Manager
2
What does the Active Managerdo?
“Times” asset class exposure to earn areturn that exceeds the returnavailable by maintaining a constantasset mix and;
Undertakes Security Selection basedon fundamental research and/orquantitative methods to earn a returnthat exceeds the return available frominvesting in the general market e.g. anIndex.
1
4
The “Beta” / “Passive” Manager
1
What does the PassiveManager do?
Attempts to match or replicateMarket or benchmark risk (couldbe Target Portfolio or Policy Risk
for Balanced Funds);
2 Beta (or Passive Managers) thusby implication, attempt to producethe expected return consistentwith the risk level of the assetsbeing invested in.
5
Lets look at a few concepts….
1
6
“Benchmarking” – The Starting Point
1 Frame of Reference: a benchmarkprovides a starting point for aportfolio manager to construct aportfolio and directs howthat portfolio should be managedon an ongoing basis fromthe perspectivesof both riskand return.
2 Performance Evaluation
7
Sub-Sector
Total Market
Style Sector
Composite
Benchmark – Selection and Uses
With the vast number ofbenchmarks to choose from,deciding which one, orwhich combination of indices,to use as a benchmark canbe difficult;
It is important however, foreach Portfolio to have aclear policy statement basedon the risk and return profileof the underlying investor.
1
2
8
Risk and Performance
Risk is inseparable from Returns and pertains to the probability of earning a
return less than expected.
Beta – this measures the market riskthat is not diversifiable by measuring thestock’s/Portfolio volatility relative to themarket. The risk of any asset is afunction of how it covaries with themarket portfolio.
The standard deviation of aninvestment's expected return isconsidered a basic measure of risk. Itmeasures the dispersion of actual returnsaround the expected return of aninvestment.
9
Efficient Market Hypothesis
Financial Markets are “informationally efficient”;
In consequence of this, one cannot consistently achieve returns in
excess of average market returns on a risk-adjusted basis, given the
information available at the time the investment is made;
Three forms of Efficient Markets are weak, semi-strong, strong.
10
Beta/Passive Strategies….
2
11
A case for the “Beta” Approach
Most actively managed funds have a challenging time beating passively
managed index funds after fees. Using Morningstar’s fund database, we
examined the performance of more than 2,000 active US equity funds during the
15-year period from July 1, 1998 to June 28, 2013. Result: only 25.6% of the active funds currently in existence
outperformed their benchmarks (nearly 75% trailed the benchmark or had an insufficient track record to compare).
(www.forbes.com)
12
A case for the “Beta” Approach
“Equity funds were the worst performing funds. Of the nine funds
analysed, none outperformed our Agusto 40 benchmark. This
relatively poor performance is accentuated given that the funds
also failed to outperform the Nigerian Stock Exchange All Share Index (NSE ASI) and the NSE 30,
which both outperformed the Agusto40 benchmark in the review period”Source (2014 Agusto & Co. Fund
Performance Report).
13
Active Vs Passive - Should there be a debate?
“Even though the debate continues, I believe the important discuss is not which Strategy or Style is better but how to implement a flavour of both in our Clients Portfolios for the simple purpose of delivering value”
14
Beta/Passive Strategy Techniques
3
15
• All securities in the index are purchased inproportion to weights in the index;
• This helps ensure close tracking;
• Higher transaction costs due to the need to buymany securities.
Indexing Strategies - Construction Techniques
Full Replication
1
• Buys a representative sample of stocks in thebenchmark index according to their weights in theindex;
• Fewer stocks purchased means lowercommissions;
• Will not track the index as closely as fullreplication, so there will be some tracking error.
Sampling
2
• Historical information on price changes andcorrelations between securities are input into acomputer program that determines thecomposition of a portfolio;
• The program will minimize tracking error with thebenchmark;
• If the historical information changes over time,the portfolio may experience very largedifferences from the benchmark.
Quadratic Optimization
3
16
THANK YOU
BETA Strategy Tools
Michael Mgwaba
Exchange Traded Products
Contents
• ETFs – the new generation of investing
• ETP structures
• ETFs globally
• Some growth stats and projections
• Uses and users of ETFs
• How the ETFs benefit African markets
18 | BETA Strategies 2014
ETFs – the new generation of investing
Exchange traded funds (ETFs) are open-ended
index funds that are listed and trade on
exchanges like stocks
ETFs enable investors to gain broad exposure
to
– Entire stock markets
– Specific sectors
– Different asset classes
– Investment themes
ETFs are
– Fast and efficient – real time access to
markets
– Liquid – market maker
– Convenient – single purchase gives
exposure to the whole market / market
segment
– Transparent
– Cost-effective – lower cost than other forms
of investing
Passive
products
Active investing does
not add value (after
costs)
Transparency (full
disclosure, no style
bias)
Simplicity and
consistency
Affordability-lower costs
Listed products
Liquidity (market maker;
as liquid as the
underlying assets)
Flexibility – trading at
any time the exchange
is open, in real time
Lower costs of
execution
Guaranteed settlement
– no counterparty risk
ETFs
Other advantages – diversification (markets,
sectors, asset classes), investor protection (no
credit risk, backed by physical, regulated)
19 | BETA Strategies 2014
ETF structure – physical based
Two major ETF structures
– Physical based (the only one
allowed in SA)
– Swap-based
First physical-based structure
introduced in 1993, when the first
US-listed tracking S&P500
(SPDR) was launched. Currently,
the majority of global ETF AUM
held in physical based ETFs
Features
– Assets held in a ring-fenced
segregated account / trust
/ring-fenced fund company
– No fund / issuer risk -
securities fully backed by
physical asset
– High level of transparency
ETF
investor
Fully
replicate
d ETF
Sec A
Sec B
Sec
C
Sec
D
Index Sec A
Sec B
Sec
C
Sec
D
=
Cash
Index
return
- Costs +
revenue
Index return Index return
20 | BETA Strategies 2014
ETF globally by regions
21 | BETA Strategies 2014
Source: Black
Rock
Global ETP Assets & Number of ETPs by Year
22 | BETA Strategies 2014
Source: Black
Rock
Global ETP Cumulative Net Flows
23 | BETA Strategies 2014
Source: Black Rock
ETP growth projections
24 | BETA Strategies 2014
ETF applications in institutional portfolios
Base: 41 institutional funds, 20 asset managers. Source: 2011 US ETF Study, Greenwich Associates: Institutional Demands for Exchange-Traded Funds Continues to Climb, May 2011
Uses of ETFs
Strategic Market exposure
Directional views: establish broad directional market position , use long/short trades
to implement market views
Core / satellite: achieve strategic focus
Rebalancing: correct drift in portfolio’s asset allocation or style
Completion: add uncorrelated instruments / asset classes to strategy
Tactical Interim beta: maintain exposure to given market while searching for specific market
opportunity
Cash management: able to invest cash rapidly to gain desired market exposure
Derivatives alternative: broad opportunity set of delta 1 exposures with single line
cash based settlement
Thematic: implement thematic exposures (e.g., dividends, alternatives, empowerment)
26 | BETA Strategies 2014
ETFs in portfolio strategies
Portfolio construction Fill allocations required by investment strategy
Improve diversification
Gain exposure to size, style, yield, sector, geography
Portfolio management Implement short-, long- term and/or neutral market views
Hard to access asset classes, themes, sector, country
Tactical Asset Allocations
Strategic asset allocation Establish core holdings
Establish single country or sector satellites
Risk control Active risk budgeting
Combine ETFs in managing total portfolio volatility or duration adjustments
in fixed income portfolios
Cash equitisation Manage inflows, outflows, transitions
Obtain a wider exposures than offered by other Delta 1 products
Exposure Exposures to markets or asset classes where one has no expertise or
operational capabilities
27 | BETA Strategies 2014
28 | BETA Strategies 2014
Several challenges facing African exchanges:
– Lack of viable investment opportunities – generally, demand far outweighs the
supply
– Securities in issue are tightly held and the secondary – exchange mediated – trade
is very thin and inefficient
– Low market liquidity
– Regulatory and system challenges
ETFs would in principle provide retail and institutional investors with an easy,
convenient and cost effective access to various assets, diversified portfolios of assets
and whole markets.
How can ETFs help in the development of
African capital markets?
How can ETFs help in the development of African
capital markets? Why started with NewGold?
29 | BETA Strategies 2014
The best first step instead was to start with ETFs on highly liquid assets that was
unavailable but attractive to the investors – such as NewGold. The expected
immediate benefits to the market was that:
– it would help strengthen the regulatory / control / operational framework by
implementing the proven international regulatory standards;
– it would provide immediate liquidity to the market and help satisfy the need of
investors for liquid securities
– it would provide investors with an access to previously unavailable asset classes,
thus improving diversification opportunities and reducing investment risk
Once these products are well established and the investors become better educated
about and more comfortable with investing in general and the investing in passive
investment products such as ETFs in particular, then it becomes feasible to expand
the product offering by creating ETFs tracking more liquid national / regional /
international equity, fixed income, etc. indices and offering those to the investors.
Challenges and experiences
30 | BETA Strategies 2014
To successfully list an ETF on the NSE, all the stakeholders like NSE, Absa Capital,
other regulators and market participants / brokers had to solve several problems
– Regulatory
Listing requirements for ETFs
Registration, reporting
Issues affecting collective investment schemes
Status of the market maker
– System / trading
Efficient market making – process, interface, systems, hedging
Settlement (different timing standards)
Efficient security transfer / fungibility
– Marketing and education – retail and institutional
Highlights
+87% % increase in AUM over last 12 m (R22.4bn to R41.8 bn)
#1 Platinum ETF in the world 4th year in a row -Risk
SA award for ETFs and RSPs
Best Performing non-sector equity ETF –5y- NewSA
1st ever Morningstar award for an ETF -ours
1st ETFs in Mauritius –NewGold and NewPlat
31 | BETA Strategies 2014
Absa’s ETP business in a nutshell
36% of ETFs in listed in SA are ours (16 out of 44)
21 ETFs and ETNs listed
5 Countries in Africa where our ETFs are listed
57% of ETF assets in SA are ours (R42.7bn out of R75.1bn)
7 Asset classes covered - the widest in SA
R42.7bn Total Assets Under Management
Source: Absa CIB, ETF issuer websites, Bloomberg. Asset data as of July 4,
2014
32 | BETA Strategies 2014
DisclaimerThis brochure/document/material/report/communication/commentary (this commentary) has been prepared by the corporate and investment banking division
of Absa Bank Limited – a registered bank in the Republic of South Africa with company registration number: 1986/004794/06 and with its registered office at:
Absa Towers West, 15 Troye Street, Johannesburg, Republic of South Africa (Absa). Absa is regulated by the South African Reserve Bank. Absa has issued
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consequential damage or losses that You may suffer from using or relying on the information contained herein even if notified of the possibility of such
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NCRCP7.
33 | BETA Strategies 2014
OJONE UMORU (MRS)
SM (Legal) Collective Investment Services
Investment and Securities Act
S. 13 (h) –empowers the SEC to
register and regulate collective
investment schemes in whatever
form
ETF Rules: 543 – 554
An Exchange Traded Fund is defined as
“an undertaking which could be a unit trust scheme; an open-ended
investment company; or any other such structure as may be
approved by the Commission, that issues unleveraged securities
or units listed on a (recognized) Securities Exchange, (and) tracks
the performance of a specified security or other assets which
includes but is not limited to stocks, basket of assets, indices,
commodity prices, foreign currency rates, or any other
appropriate benchmark approved by the Commission from time
to time.” 1
1. SEC Rules as amended in 2011.
An ETF may issue/offer Units by:
an offer for subscription to qualified investors or the general public;
such other methods as may be acceptable or prescribed by the Commission from time to time.
The Commission has the discretion not to vary or allow a particular mode of Offer if it is not in the interest of investors .
Rule 249A (4)(a)&(c)
An ETF shall comply with the listing
requirements of the relevant exchange
Registration and authorization by the
SEC must precede listing of the ETF
Form SEC 6A (application form)
Prospectus
Trust Deed*
Custodial Agreement
Authorized Dealer Agreement
Vending Agreement
Incorporation documents of the fund manager, trustee & custodian
Any other material agreement
Evidence of payment of the applicable fee
*for Trust structures only
Subject to approval/registration by
the SEC prior to listing on a
Nigerian Exchange
Compliance with relevant rules on
cross border securities transaction
Confirmation of
registration/approval by the
relevant foreign authority.
Rule 249B (5)
The general disclosure requirements, and A disclaimer statement that “the
valuation approved/accepted by the Commission…shall not be considered as an endorsement by the Commission of the value of the subject assets for any other purpose”; The underlying index, securities or
asset(s) the ETF intends to track or replicate and a description of the market sector it represents; The ETF’s investment strategy (full
replication or representative sample);The Fund’s policy on investment
income;
Circumstances that may lead to tracking errors and strategies to be employed in addressing and minimizing same;
The material risks of investing in the ETF and the mitigants;
The weightings of the major components securities or commodities of the underlying index.
Procedures in relation to creation and redemption of Units;
A statement that there is no guarantee or assurance of exact or identical replication of the performance of the index (if it tracks an index);
Details of the pricing of Units;Means for obtaining update/other information on
the underlying asset
Same required for the Trust Deed if applicable
An ETF Manager is to provide the following information on a suitable/acceptable channel:
o Indicative Optimum Value (IOPV) per Unit –Daily;
o Portfolio Deposit and NAV per Unit – Daily;
o Number of Units in circulation – Monthly;
o Index level or underlying asset price (as applicable) – for the preceding day;
o The constitution of any index basket – Quarterly.
Rule 249B (8) (i)
The ETF or ETF Manager’s website;
A hyperlink from the ETF/ETF Manager’s
website to that of the relevant Exchange;
Information pages of vendors who disseminate
trading information in their ordinary course of
business;
Any electronic medium for information
dissemination provided by the Exchange.;
Any other channel approved by the
Commission.
Rule 249B (8)(II)
Institutional investors request for creation or redemption of the in creation unit sizes or multiples
thereof ETF shares known as Creation Units from the Fund Manager. This request must be in writing
Consideration for this request may be in-kind or partly in-kind and partly cash - as stipulated in
the Offer Documents
Only authorized dealers may participate in the in-kind creation/redemption process –unless the offer
documents states otherwise
Provisions/procedures relating to creation andredemption of Units are to be adequately disclosedin the Offer and constituent documents
All cost and allowable expenses must beadequately disclosed in the Offer documents.
ASSET BASIS OF
VALUATION
ALTERNATIVELY
Securities/
commodities
listed on an
Exchange
Market value Where market value does not
represent fair value then fair
value determined in good faith
may be used –as approved by
Trustee or disclosed in the
Offer documents
Nigerian Govt.
Securities
Market price -At cost & adjusted for
accrued interest
-based on amortization of
premium and accretion of
discount
-based on average price
obtained from at least 3 PMD
Rule 249 B(11)
Currency (liquid) assets Nominal value -
Any other investment Fair value as
determined in good
faith on basis verified
by the Auditor to the
Fund and approved by
the Trustee/disclosed in
the Offer documents
-
All reporting and audit requirements of a CIS
applies.
In addition:
Quarterly reports of the ETF to be published on the
Fund/Fund manager’s website within a month;
The Custodian/Depository to conduct and submit a
report of reconciliation of the Units and underlying
assets to the Commission on a quarterly basis;
The annual report to be published and distributed
to Unit holders within 3 months of the Funds year
end.
S.161 (ISA) -Illegal to deal in
unregistered units
Proposed Rule on one month window
Liquidity
The requirement of an Authorized
Dealer
Costs/tracking error implications
Investment Committee
INVESTOR PROTECTIONFund Structure
Requirement to hold full portfolio
Ensuring information dissemination
Continuous monitoring
Exchange Traded Funds : An Overview
Benefits and Risks of ETFs
ETFs in African Markets
ETFs in Nigeria
The NewGOLD & VEGIF ETF
The LHE ETF
Transaction Highlights
Strategies for using ETFs in your Portfolio
Conclusion
54
Outline
55
Exchange Traded Funds (ETFs): An Overview
Exchange traded funds (ETFs) are one of the fastest growing instruments in the world
with c.USD1.5 trillion in asset under management globally (Source: Nigerian Stock
Exchange)
An Exchange traded fund (ETF) is a security that tracks the performance of an index,
basket of assets or a commodity.
It is an open-ended passive investment fund, listed and traded on the stock exchange
just like equities.
This investment vehicle gives investors a convenient way to purchase a broad basket
of securities in a single transaction.
Essentially, an ETF offers the convenience of a stock along with the diversification of a
mutual fund in a more cost effective structure.
ETFs are classified as open-ended “Unit Investment Trusts”.
Global SceneETF UNDERLINING
INDEX/COMMODITY
EXCHANGE
SPDR S&P 500 ETF (SPY) S&P 500 index New York Stock Exchange
Lotus Halal Equity ETF NSE Lotus Islamic Index Nigeria Stock Exchange
Dow Jones Islamic Market
Turkey ETF
Dow Jones Islamic Market Turkey
Index
Istanbul Exchange
Vetiva Griffin 30 Exchange
Traded Fund
NSE 30 Index Nigeria Stock Exchange
ETFS physical platinum
ETF
Platinum HONK KONG Stock
Exchange
NewGold ETF Gold Bullion held by ABSA
Capital in South Africa but traded
on the London Stock Exchange
Nigeria Stock Exchange
56
Exchange Traded Funds (ETFs): Examples
• ETFs provide an important diversification tool forPFAs, individual investors, foreign investors andportfolio managersDiversification
• ETFs offer two sources of liquidity: Primarymarket and secondary market.
• Ease of trading on the stock exchange offersgreater liquidity
Liquidity
• Separation of fund management functionsfrom asset custody. This is in line withrecommended best practice.
• Good governance , enhanced investorsprotection and successful investmentoutcomes
Excellent Fund Structure
•ETFs can be bought and sold rapidly in response to market movements
Flexibility
57
Exchange Traded Funds: Benefits
• Some ETFs distribute returns quarterly to unitholders in the event of excess cash in the fundpool from dividends
Distributions
• As a passive fund, the ETF would havemuch lower transaction costs and fees whencompared to typical mutual funds or stock.
Lower Transaction Costs
58
STATUTORY CHARGES COMPARISM -Equities vs. ETFs
SELL SIDE
NSE
FEES
VAT ON NSE
FEES
(at 5%) CSCS FEES
VAT ON CSCS FEES
( at 5%) STAMP DUTIES
TOTAL
STATUTORY
CHARGES
Equities 0.3000% 0.0150% 0.3000% 0.0150% 0.075% 0.7050%
ETF 0.0160% 0.0008% 0.0160% 0.0008% 0.075% 0.1086%
Difference 0.5964%
Exchange Traded Funds: Benefits
59
Exchange Traded Funds: Benefits
STATUTORY CHARGES COMPARISM -Equities vs. ETFs
BUY SIDE SEC FEES
VAT ON SEC FEES
(at 5%) CSCS FEES
VAT ON CSCS
FEES
( at 5%)
STAMP
DUTIES
TOTAL
STATUTORY
CHARGES
Equities 0.3000% 0.0000% 0.0000% 0.0000% 0.075% 0.3750%
ETF 0.3000% 0.0000% 0.0000% 0.0000% 0.075% 0.3750%
Difference 0.0000%
• ETFs leverage on the fund size and the passivenature to reduce transaction costs & enhanceportfolio returns. Total fund costs includingmanagers fees are negligible 1.12% vs 3-4% formutual funds
Cost Efficient
• ETFs appoint market makers to ensure thatmarket transactions are as smooth andcontinuous as possible . This providesunitholders with liquidity whenever they want tobuy and sell.
Market Maker
Exchange Traded Funds: Risks
Risks Impacts
Market Risks Prices will fluctuate as the underlying
securities prices go up and down
Operational Risk System Malfunctioning (e.g. NSE trading
platform) may delay trading on the ETF
Secondary Trading Risk No guarantee that an ETF may create
liquidity on the secondary market. However,
the appointment of a market maker provides
a mitigant to this risk
61
Exchange Traded Funds (ETFs): African Markets
Except for South Africa with a developed ETF market (44 ETFs), The
ETF market is in its infancy in Africa
Egypt, Botswana and Nigeria are other African countries that have
explored ETFs
International ETFs have been created to track the performance of
African market stocks
Fund Name Ticker
Sub-Saharan
Weight (excl.
SA)
Frontier African
Countries Represented
Nile Pan Africa Fund NAFAX 25.1% Nigeria, Ghana
Wasatch Frontier Emerging Small
Countries FundWAFMX 23.9% Nigeria, Kenya, Ghana, Namibia
Market Vectors Africa Index ETF AFK 20.8% Nigeria, Kenya
Templeton Frontier Markets TFMAX 18.9%Nigeria, Kenya, Zimbabwe,
Mauritius, Ghana, Malawi
HSBC Frontier Markets Fund HSFAX 17.5% Nigeria, Kenya
iShares MSCI Frontier 100 Index Fund FM 15.5% Nigeria, Kenya, Mauritius
Harding Loevner Frontier Emerging
Markets PortfolioHLMOX 13.8%
Nigeria, Kenya, Ghana, Mauritius,
Senegal
T. Rowe Price Africa & Middle East TRAMX 10.7% Nigeria, Ghana, Zambia
Commonwealth Africa Fund CAFRX 4.0% Nigeria, Kenya
International ETFs tracking African Markets
Exchange Traded Funds: Nigeria’s experience
ETFs are recent innovations in the Nigerian capital market.
ETFs account for 0.0178% of the total Market Capitalization of the Nigerian
Stock Exchange. (as at 06th August, 2014)
Vetiva Capital Limited, in collaboration with ABSA Capital, a South African
investment banking firm, introduced the first ETF, the NewGold ETF in
December 2011.
Vetiva Griffin 30 Exchange Traded Fund (VG 30 ETF) which tracks the price
and yield performance of the NSE 30 was launched in March 2014.
To enable investors benefit from the historical superior performance of the NSE
Lotus Islamic Index (NSE LII), Lotus Capital has created The Lotus Halal Equity
ETF (LHE ETF) to track the performance of the NSE LII.
There is still a lot of room for growth in the Nigerian ETF market
63
NEWGOLD ETF
Year Launched : 2011
Description: The NewGold ETF was created to track the price of Gold Fix PM on the
London Stock Exchange
Sponsor: Vetiva Capital Management Limited
YtD Return: 8.09% (As at 7th August 2014); Gold Fix PM YtD Return: 8.36%
Gold Fix PM slightly outperformed the NewGold ETF by 27 basis points
64
ETFs on The Nigerian Stock Exchange
1100
1300
1500
1700
1900
1700
2200
2700
3200
3700
Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14
NewGold GoldFix Price
VETIVA GRIFFIN 30 ETF
Year Launched : 2014
Description: The VG30 ETF is designed to track the performance of the constituent
companies of the NSE 30 Index
Sponsor: Vetiva Fund Managers Limited
YtD Return: 13.46% (As at 7th August 2014); NSE 30 YtD Return: 2.06%.
NSE 30 has however returned 13.83% since the Vetiva ETF was listed.
65
ETFs on The Nigerian Stock Exchange
16
16.5
17
17.5
18
18.5
19
19.5
20
1650
1700
1750
1800
1850
1900
1950
2000
NSE 30 VETIGIF 30 ETF
Vetiva Griffin 30 ETF has returned 13.46% YtD return as at August 07th, 2014.
Fund expenses account for the slight tracking error with NSE30.
NSE ASI underperformed the VG30 and the NSE30 though with returns of 11.63%
since VG30 was launched.
VG30’s returns correlation to NSE 30 and NSEASI are 0.789 and 0.796
respectively
ETFs on The Nigerian Stock Exchange: VG30 vs. NSE30
Performance and Correlation with NSE ASI
0.95
1
1.05
1.1
1.15 NSE 30 VETIGIF 30 ETF NSEASI
VETIVA GRIFFIN 30 ETF
Possible Causes: Capital Gains distributions, NSE30 index changes, Cash drag,
Fund management and trading fees
NEWGOLD ETF
Possible Causes: Cash drag, Fund management and trading fees, Capital Gains
distributions, movements in the US dollar price of gold, the Rand/US Dollar exchange
rate and the Naira/US Dollar exchange rate
ETFs on The Nigerian Stock Exchange: Tracking
Errors
The LHE ETF is about to be the newest ETF addition to the Nigerian
Stock Exchange
Description: The Lotus Halal Equity Exchange Traded Fund “LHE ETF”
is designed to track the performance of the NSE-Lotus Islamic Index
(NSE-LII).
It is designed to enable investors obtain market exposure to the securities
of the constituent companies of the NSE-LII and to replicate, the price and
yield performance of the index.
Objective: To grant investors easy access to the constituent stocks of the
NSELII, especially to those who have a special interest in Shari'ah
complaint stocks.
68
LOTUS HALAL EQUITY ETF (LHE ETF)ETFs on The Nigeria Stock Exchange
Lotus Halal Equity Exchange Traded Fund (LHE
ETF)
69
NIGERIAN STOCK EXCHANGE LOTUS ISLAMIC INDEX
(NSELII)
THE INDEX: The NSE Lotus Islamic Index (NSE LII)
An equity index that tracks the performance of a basket of
selected Shari’ah compliant equities listed on the floor of the
Nigerian Stock Exchange.
2009
The index was officially launched in 2012
Adjusted Market Capitalization Weighted Index
15 screened equities with weights applied to component stocks
and sub-sectors. Each sub-sector weight is capped at 40%
while the weight of each component stock is capped at 30%.
Stocks must meet qualitative and quantitative criteria and
certified by renowned Islamic Scholars
December 31, 2009
1,000
Description
Origination
Date
Date of
Launch
Type of
Index
Component
s & Weights
Eligibility
Criteria
Base Date
Base Value
70
NIGERIAN STOCK EXCHANGE LOTUS ISLAMIC INDEX
(NSELII)
THE INDEX: The NSE Lotus Islamic Index
The NSE LII is reviewed and rebalanced bi-annually, on the first
business day in January and July every year.
o OKOMUOIL
o PRESCO
o JULIUS BERGER
o DANGOTE CEMENT
o NESTLE
o LAFARGE WAPCO
o UACN
o CADBURY
o GLAXOSMITHKLINE
o ASHAKA CEMENT
o CHEMICAL AND ALLIED PAINTS (CAP)
o PATERSON ZOCHONIS (PZ)
o CCNN
o UNILEVER
o NASCON
Index
Review
Index
Component
Stocks
71
NIGERIAN STOCK EXCHANGE LOTUS ISLAMIC INDEX
(NSELII)
The NSE LII’s Screening Process
o This stage eliminates any listed company that deals in prohibited
activities such as alcoholic beverages, tobacco, conventional
financial services such as banks and insurance companies,
gambling and adult entertainment.
o This involves elimination of companies with unacceptable levels of
debt, cash and interest income based on the standard of AAOIFI
(Auditing Organization for Islamic Financial Institutions)
o The quantitative screening also considers the market capitalization
and liquidity of stocks.
Qualitative
Screening
Quantitative
Screening
Screening
Metrics
Stocks in the index undergo two main stages of screening; qualitative and
quantitative
%
Debt Screen <30
Cash Screen 1 <5.00
Cash Screen 2 <30.00
Accounts Receivables <45
72
Historical Levels of NSELII
73
22.53%
41.98%
-13.60%
44.21%
61.84%
0.40%
-33.78%
18.93%
-16.31%
35.45%
47.19%
2.79%
-34.00%
-24.00%
-14.00%
-4.00%
6.00%
16.00%
26.00%
36.00%
46.00%
56.00%
2009 2010 2011 2012 2013 H1 2014
NSE LII NSE All Share Index
Historical Performance of the NSE LII
The NSELII outperforming the NSEASI
Correlation Coefficient of NSELII and NSE All Share Index is
0.76
Source: Vetiva Capital Management, Lotus Research
74
Dividend Yield and P/E Ratio of NSE LII
19.04
20.7
18
18.5
19
19.5
20
20.5
21
NSEALSI NSELII
P/E (x)
3.75%
3.82%
3.70%
3.72%
3.74%
3.76%
3.78%
3.80%
3.82%
3.84%
NSEALSI NSELII
Dividend Yield
*P/E *DIV YIELD
NSELII 19.04x 3.82%
NSEALSI 20.7x 3.75%
*Figures as at 30th June,2014
Fund Manager: Lotus Capital Limited
Issuing House: Vetiva Capital Management Limited
Trustee to the Fund: First Trustees Nigeria Limited
Custodian: Citibank Nigeria Limited (Global Transaction Services)
Authorized Dealer/
Sponsoring Broker
Vetiva Securities Limited
Transfer Agent: Central Securities Clearing Systems Plc
The Offer: 100,000,000 units of Lotus Halal Equity ETF at an Indicative
unit price equal to 1/200 of the value of the NSE-Lotus Islamic
Index on the preceding day of the Offer subscription
Subscription Method: Subscription in units in the Initial Offer may be via one of the
two ways:
1. Payment of cash in Naira
2. By the delivery of one or more baskets (i.e. Securities for
units in specie Subscriptions)
LHE ETF: Transaction Highlights
Minimum Subscription
unit:
For cash subscriptions: A minimum of 200,000 Units (i.e. a
basket of Lotus Halal Equity ETF)
For In-specie subscriptions A minimum of 5,000,000 Units
(i.e. 25 baskets of Lotus Halal Equity ETF)
Issue Price: For in specie subscriptions: the subscription price under the
initial offer shall be discharged by the delivery of 25 baskets
of the constituent securities, entitling the investor to
5,000,000 units of the LHE ETF
For Cash Subscriptions: the subscription price per unit
during the initial offer period will be based on 1/200 of the
closing value of the NSE-LII on the preceding day of the
subscription, subject to a minimum of one basket
Quotation: An application has been made to the Council of the Nigerian
Stock Exchange to list the LHE ETF
Opening Date: 15 August 2014
Closing Date: 11 September 2014
76
LHE ETF: Transaction Highlights
In-specie Subscription: In-specie Subscription simply implies an Offer for
Subscription on a “Securities for Units” basis. This means
that an investor will deliver a full block or more of the
constituents securities (25 baskets the NSELII constituent
securities) in exchange for 5,000,000 units of the Lotus
Halal Equity ETF
Application Procedures: o Investor executes application form included in the
Prospectus (subject to a minimum of 5,000,000 units and in
subsequent multiples of 200,000 units);
o Investor executes the CSCS ETF Detachment Form;
o The Investor's broker or Custodian (depending on where the
underlying shares are held) will also need to sign-off on the
detachment form;
o Investor or investor’s broker forwards the executed
Application and Detachment Forms to Vetiva;
o Vetiva reviews forms and forwards same to the Transfer
Agent (CSCS) for processing;
o CSCS detaches underlying securities from Investor’s CSCS
Account on receipt of executed detachment and application
form during the Offer Period.
o On receipt of the Allotment Approval from the Securities and
Exchange Commission, Investor’s CSCS accounts will be
credited with the ETF units.77
Transaction Highlights: In-Specie Subscription
Procedure
Transfer Agent: Central Securities Clearing Systems Plc
Investment Strategy: The Fund intends to fully replicate the NSE-Lotus Islamic Index
Policy on Investment
Income:
Investment income earned if any, less expense, may be
distributed to Unit holders quarterly,
Creation/Redemption: Investors, who choose not to trade on the secondary market,
may purchase/sell units of LHE ETF Securities through the
process of creation/redemption, subject to a minimum creation
/redemption value threshold of a block of ETF units .
Sponsor: The Fund is sponsored by Lotus Capital Limited. Lotus Capital
Limited is duly registered with the Securities and Exchange
Commission as a Fund Manager
Investment Objective &
Policy:
The Lotus Halal Equity ETF is designed for and offered to
investors seeking market exposure to the constituents of the
NSE-LII.
The investment objective of the Fund Manager in respect of the
LHE-ETF securities is to mirror the performance of the NSE-
Lotus Islamic Index
LHE ETF: Transaction Highlights
ETFs typically used as a tool to invest in a broad market index – equity, fixedincome
Buy and hold Strategy – passively move in tandem with the benchmark
Can actively manage your portfolio by buying and selling ETF according to yourviews
Core Satellite – augment your core holdings with specialized ETFs e.g. sector,commodity, ethical etc. makes your portfolio more active; or make the ETF yourcore and augment with stock picks i.e. ‘beta’ core then search for ‘alpha’
Building Blocks – for multi asset class portfolios. Simply buy ETFs for each classesin required allocation
Short Sales – ETFs can be used in hedging strategies. Any strategy that can beimplemented with a stock or bond can be applied to ETFs however, you are tradingand entire market segment with ETFs
Pairs Trading
79
LOTUS HALAL EQUITY ETF (LHE ETF)Strategies for using ETFs in your Portfolio
80
LOTUS HALAL EQUITY ETF (LHE ETF)Strategies for using ETFs in your Portfolio
Correlations of Nigerian ETFsfrom the inception date of VETGIF30 ETF: March 14th, 2014 - Aug 6th, 2014)
Source: Lotus Capital Research
Cor (VG30,NSE30) 0.78948952
Cor (VG30,NSEASI) 0.796266178
Cor (NSE30,NSEASI) 0.870944219
Cor (VG30,NSELII) 0.471445191
Cor (NEWGOLD,NSELII) 0.115090941
Cor (VG30,NEWGOLD) -0.03935275
combine the best features of mutual funds with the trading flexibility of stocks
offer diversification and low expense ratios
often improve performance - random walk theory
can be used to implement active management strategies
are easier for rebalancing – can increase or decrease equity exposure by tradingETF
are easier to monitor and understand – less complex portfolios
lower transaction costs – fewer trades, fewer stocks, fewer commissions
are typically less volatile
can be adapted to suit many investment objectives
are convenient, cost efficient and flexible. Easy to understand and easy to use.81
LOTUS HALAL EQUITY ETF (LHE ETF)Conclusion
Exchange Traded Funds -
Thank you