Stock Exchange of Mauritius: Newsletter June 2016 INSIDE THIS ISSUE: 1 EXCHANGE INSIGHT: SEM interviews Gareth Stobie, Managing Director of Coreshares in the context of the listing on SEM of the CoreShares S&P500 ETF, the first S&P500 product to be listed on an African Exchange as well as the listing of CoreShares S&P Global Property 40 Index which is the first of its kind worldwide 2 INDUSTRY FOCUS Publication of this newsletter has been done with reasonable care and diligence. However the Stock Exchange of Mauritius Ltd. makes no representations gives no warranty and disclaims all liability in respect thereof and shall not be held liable for any damage, loss or costs incurred resulting from any error in the information or any use of the said information. Appropriate independent advice should be obtained before making any investment decision. The concept of Smart Beta
1 EXCHANGE INSIGHT: SEM interviews Gareth Stobie, Managing Director of Coreshares in the context of the listing on SEM of the CoreShares S&P500 ETF, the first S&P500 product to be listed on an African Exchange as well as the listing of CoreShares S&P Global Property 40 Index which is the first of its kind worldwide 1. CoreShares S&P Global Property ETF and CoreShares S&P 500 ETF have recently been listed on 23 May on the Official Market of the Stock Exchange of Mauritius (SEM). Coreshares is is a manager of a collective investment scheme in securities that specialises in index tracking investment solutions across Exchange Traded Funds (ETFs). Can you tell us more on Coreshares? CoreShares is leading African passive investment management business with a particular focus on smart beta. CoreShares focusses on the benefits of index investing: low cost, transparent and reliable performance. The company was started in Johannesburg, South Africa, but since Monday the 23rd May we are managing Exchange Traded Funds across three African exchanges: JSE, BSE and SEM. CoreShares manages 8 ETFs on the JSE. 2
2. The CoreShares S&P Global Property ETF and CoreShares S&P 500 ETF are respectively the 1st S&P 500 ETF in Africa and the 1st ETF on the S&P Global Property 40 Index globally. Can you elaborate on the rationale which motivated CoreShares Global Investments PCC to list these two funds on the SEM? CoreShares was aiming to diversify into global based index strategies which required us to create an off shore management company. Mauritius has proven to be a very reliable, professional capital markets centre to set up such an operation. Aside from accessing the local investor base (in Mauritius), CoreShares will also be cross listing the products on the JSE. The listed CoreShares S&P 500 ETF on the SEM track the Vanguard S&P 500 ETF which invests in stocks of the S&P 500 Index, representing the top 500 U.S. listed companies. The objective of this fund is to closely track the index s return, which is considered a gauge of overall U.S. stock returns. Whilst the CoreShares S&P Global Property 40 ETF tracks the performance of the leading 40 global property companies from 8 different countries. The constituents of the index are large, well-traded, liquid property companies from North America, Europe and Asia Pacific currently trading on the developed market exchanges. 3. Investing directly in the 500 of the top companies in leading industries of the U.S. economy or the global property market is traditionally difficult and expensive for the investor at large to access. ETFs are generally known for their low cost structure and these two international products soon to be listed on SEM, are no exception. In this connection, what are the distinguishing features of CoreShares S&P Global Property ETF and CoreShares S&P 500 ETF which translate into unique benefits for investors subscribing to it? The S&P500 ETF, whilst a fairly common strategy globally, is the first to list in Africa thus providing local access on the local exchange. It is a broadly diversified index which could form an excellent building block to any portfolio. The Global Property ETF is the first of its kind (globally) to track that particular index. The index provides liquid exposure to some of the worlds largest property companies. Listed property has proven to be a good diversifier within a portfolio and an attractive way to generate income. The S&P 500 index was in fact the first US market-cap weighted stock market index with over USD 7.2trn benchmarked to the index, with index assets comprising approximately USD2.2trn. The growth perspective of the US economy is looking positive, which according to the World Economic Outlook Projections is predicted to grow at an annualised rate of 2.7% for 2016. This makes the prospective of investing into ETFs which track the S&P 500 appealing for investors. I must add that passive Index investing in the S&P 500 has gained broad popularity after the most famous of investors recently endorsed the strategy. As Warren Buffet said, My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund I believe the trust's long-term results from this policy will be superior to those attained by most investors whether pensionfunds, institutions or individuals who employ high-fee managers. To sum up, through these ETFs, we are granting access to the S&P Dow Jones indices to local individuals and institutional investors. The S&P 500 is probably the most accurate quantifier of the U.S. economy and the S&P Global Property gives access to the buoyant international property market. 3
4. Gareth, you are the Managing Director of Coreshares. Africa has been doing very well relative to its peers over the last decade, despite the global economic slowdown. Going forward, how do you personally evaluate growth avenues for the investor investing in Africa? I am certainly an Afro-optimist and I believe the content, as diverse as it may be, has a lot to offer to the global economy. Mauritius has risen to be one of the most efficient economies on the continent and we are pleased to be building a presence here. 4
INDUSTRY FOCUS: The Concept of Smart Beta In the past, equity investors had mainly two choices. Firstly, those who considered stockmarkets to be highly efficient (reflecting all available information) or who believed that the portfolio managers would be unable to deliver superior performance relative to the markets, preferred investing in low-cost market capitalization-weighted index funds. This is a passive strategy. Then, we could also have investors who believed that financial markets were inefficient and that their portfolio managers could do better than the market over time. Such investors would favour an active management strategy of investing. This would essentially imply trying to buying at a low price and selling at a hopefully higher price. Both approaches however have disadvantages. The passive strategy tends to favour investment in stocks with higher market capitalization. Furthermore, the active strategy could result in higher fees being paid, lack of transparency and also no guarantee of beating the stockmarket. The 'Smart Beta' concept, which is a relatively new form of investment management, now tries to offer investors the benefits of both the active and passive methods. What is smart beta? A smart beta fund is a fund which factors in anything other than market capitalization in weighing their holdings. The beta part of the name refers to an index, or an index fund s return. The smart part means that the funds weight stocks using factors other than price. These factors could for instance include low volatility, size, momentum, dividend payouts, sales growth and value. Thus, with a smart beta strategy, market capitalization will not be the key consideration. Smart beta funds have been described as a modest mix of active and passive investing. Smart beta is also known as 'alternative' beta. Smart beta attempts to improve returns, reduce risk, increase diversification and also give greater exposure to the market. By combining characteristics of both passive and active investing, investors retain many benefits of passive strategies whilst also attempting to improve returns. Smart beta strategies implement a rule based alternative to passive investing outside of the traditional weighted cap strategy. Smart beta funds moreover attempt to increase risk adjusted returns by taking advantage of anomalies in particular asset classes. The below table summarizes the advantages and disadvantages of the smart beta approach. Advantages Better Diversification as concentration in few stocks/ sectors is avoided Possibility to generate returns higher than capitalization indices over the long term Lower costs than a pure active strategy Improved Transparency Potential reduction in risk as stocks are weighted using different methodologies Disadvantages More costly than a passive strategy/ traditional index funds No guarantee of superior performance No capital protection Could imply taking more risk and this will depend on the fund/factor selected Strategy/Factor might be complex to understand 5
Conclusion Smart beta still remains in a relatively infancy stage. Although well known in equities, we might soon see smart beta strategies growing in the fixed income space. In the Mauritian context, it is more than likely that members of Investment Committees, Management Committees as well as Pension Fund Trustees would gradually need to get more accustomed to 'smart beta' strategies. Since institutional investors are now paying more attention to transparency and fees, they may also search for new sources of return. We therefore expect smart beta funds to attract further interest in the years to come. About the author: Imrith Ramtohul holds the Chartered Financial Analyst designation and is a Fellow of the Association of Chartered Certified Accountants UK. He works as Senior Investment Consultant for Aon Hewitt Ltd. Prior to joining Aon Hewitt, Imrith held the position of Senior Manager- Investment at Mauritius Union Group. He currently also serves as a Member of the CFA Institute Global Investment Performance Standards (GIPS) Asset Owners Subcommittee. 6
INVESTOR EDUCATION: Basics on Exchange Traded Funds (ETFs) The definition of ETFs is simple. ETFs are open-ended index funds that are listed and traded on Exchanges like stocks. However, by considering this definition more closely, one can grasp several important characteristics of ETFs that distinguish them from other investment alternatives. ETFs are: index funds or index trackers products that track economic performance of large collections of different stocks or other financial assets (e.g., bonds, commodities etc.). These large collections are called indices and are constructed in such a way to approximate the economic performance of the overall market or a market segment. For the investors it means that: 1) their investment is diversified ( not all eggs in a single basket principle) - purchase of a single share gives exposure to the whole market or market segment; 2) index tracking investment is done on a passive basis a disciplined investment strategy generating market returns at generally significantly lower costs than their active counterparts; and 3) investors know exactly what they are invested in because the composition of any index is known exactly on a daily basis. An investment in an ETF is fully transparent, contrary to traditional funds, which generally disclose their holdings infrequently and without much detail; exchange-traded contrary to most other investment products popular with retail investors (e.g., unit trusts, annuities, etc.), ETFs are listed on a stock exchange, giving investors real-time access to markets, and with it more control over their investments. ETFs can be bought and sold at any time during the trading day; open ended every ETF security issued and listed on an exchange is linked to a physical holding of underlying assets comprising an index tracked by the ETF. For the investors it means that: 1) the value of any ETF is fully backed by a physical holding of underlying assets there is no gearing of any kind; derivatives are not used; 2) all the returns generated by those assets (interest, dividends as the case might be, as well as the capital growth) are passed (after fees) to the investors; 3) ETFs can (for larger holdings) be exchanged for underlying assets and vice versa, underlying assets can be exchanged for the holding in the ETF. This ensures that the price of an ETF will always fully track the value of the index (i.e., the underlying assets); and 4) ETFs are very liquid (or as liquid as the underlying assets) because, similarly to mutual, whenever there is demand for more ETF securities, they can be created by purchasing underlying assets (and, conversely, any surplus selling of ETFs by investors can be accommodated on a similar basis). The liquidity is greatly enhanced by the (statutorily mandated) existence of a market maker, a specialized market participant that will provide necessary liquidity to all other market participants (i.e., there is always somebody on the other side of the trade). How to invest in an ETF on the Stock Exchange of Mauritius? It is as simple as investing in a regular share. All it takes is a call to your stockbroker. 7
3 SEM TRADING STATISTICS: Official Market Data 8
Development and Enterprise Market Data 9