[miningmx.com] — THE two new listed products – the “Resi20’ and the “Top40’ (Swix), recently created by Satrix and listing in Johannesburg this week – are reasonably worthless and unimaginative as far as the ordinary investor is concerned.
These two new exchange traded funds (ETFs) were designed to meet possible needs of institutional investors. For the man in the street, the ordinary Satrix40 is still the cheapest and best distributed exposure to the JSE.
Investors who want to specialise in resources shares will do better buying BHP Billiton or Anglo American directly rather than the concoction offered by the 19 shares in the Resi20.
A few years ago, Satrix listed three products on the JSE: the Satrix40, SatrixIndi and SatrixFini. As the names indicate, they represent the price movements of the top 40 shares, the top 25 industrial shares and the top 15 financial shares respectively.
These ETFs are an extremely cost-efficient way for small investors especially to obtain proper exposure to the share market.
In order to expand its product range and compete more effectively, Satrix – a JSE subsidiary – recently issued two new products. The international popularity of resources recently led Satrix to form a special index and ETF, the so-called Resi20. However, according to the prospectus of 15 March 2006, the 19 shares included in this index are so unimaginative that it could just as well have been made up of only three shares: Anglo, BHP Billiton and Sasol, which have a total weight of 72,65% in the index.
In the Resi20, the 11 small shares carry a total weight of only 3,07%. They could just as well have been left out. It’s also doubtful whether the three large gold mines, with a total weight of 13,57%, belong in a resources index. After all, gold is a precious metal, not a resource, and its price is influenced by factors other than world economic growth. Even platinum, with a weight of 10,71% in the index, should rather be with precious metals.
Investors who want exposure to the prosperity of resources certainly don’t need to look any further than BHP Billiton. The company’s portfolio of resources assets, which are spread worldwide, offer far better exposure than the little list of 19 companies in the Resi20 index.
The weightings allocated to the 41 shares in the Top 40 Swix index considerably reduce the weight of international and large companies. According to Satrix CEO Mike Brown, South Africa’s institutional investors actually wanted an index that fluctuates less than the ordinary Satrix 40, with its substantial exposure to foreign companies. But perhaps they were just finding it increasingly difficult to beat the Satrix 40, so they wanted something less dynamic.
Rather than using the ordinary market capitalisation of the top 40 shares to determine the relative weight of each one, only the estimated South African shareholding in each company was used: that is, shareholder-weighted top 40 – which explains the name Top40 Swix.
From an investment viewpoint it makes no sense. If the income that the specific company earns in South Africa is used as a base, it would make the Top 40 more representative of South Africa’s economy.
For example, BHP Billiton earns only about 10% of its total income in South Africa.
South Africa’s shareholding as a norm for determining the weight of a share in a portfolio or index is meaningless and also tells me nothing. In fact, it actually has a negative investment value. The weight of a share that has in the past attracted little or no foreign interest will rise in the Top40 Swix and one that’s popular overseas will fall. Absa, with its 60% foreign interest and a weight of 2,57% in Swix, is now worth less than half of Standard Bank with its weight of 7,26%.
An investor who buys this index reduces his international exposure so much that he’ll have to buy an extra product to correct the exposure. However, an investment in the ordinary Satrix 40 gives so much quality international exposure that no other products are necessary.
