South Africa’s Satrix welcomes ESG ETFs
South Africa’s fund management company, Satrix, started life as an ETF issuer, in November 2000, when it launched the first ETF in South Africa, the Satrix 40 ETF, as a joint venture between Sanlam Investments and others. Since 2012, Sanlam Investments has been the full owner of Satrix.
Chief Investment Officer, Kingsley Williams explains that the firm has assets under management of R130 billion (USD9.2 billion) in a range of funds including ETFs, mutual funds, offshore funds and separately managed accounts (SMAs) for retail and institutional clients. Satrix is one of South Africa’s biggest providers of index-tracking investment solutions.
“Sanlam had a vision to put a strong commitment towards indexing in general and ETFs specifically,” Williams says. ETFs represent about 20 per cent of the assets, with a fairly even split across the different investment vehicles Satrix manages from its predominantly institutional client base.
“The Johannesburg Stock Exchange (JSE) is seeing lots of new products come to market,” Williams says, “and we have seen healthy growth in our ETF book over recent years.
A significant change for the South African ETF market has been that ETFs can offer global investment exposure. “That area has really blossomed and flourished, partly off the back of clients experiencing lacklustre returns locally,” he says. The vagaries of the South African rand also have its part to play. “The rand can amplify returns when it weakens as you can get an additional boost on your offshore investments when that happens. Local investors can diversify their portfolios away from the universe available on the JSE, which can also provide a hedge against the currency weakening.”
The rand is often used as a proxy for emerging market risk, Williams says. “As soon as there is a scare or fear in the markets there is generally a flight to safety to the US dollar and often at the expense of the emerging markets, and the rand often bears the brunt of that, because it is liquid.”
Local investors within South Africa can utilise this as the rand’s movement can smooth out losses or negative returns in US dollars. “But the reverse can also happen,” Williams says. “It can dampen returns from offshore investments and, in fact, the currency has been strengthening over the past year.”
The bulk of Satrix’s ETF investors are retail, attracted by the ease of access and range of offerings available. “It is the core of our DNA to make investing accessible and to democratise investing as much as possible,” he says. “ETFs represent that and Satrix has created and enabled platforms that make it possible for investors to access them as well.”
Sustainability has become increasingly important for investors over recent years. “There is a growing interest in what we offer that is sustainable,” Williams says. “And one of the challenges you have in implementing those types of strategies in a pretty small and concentrated market like South Africa is that if you exclude companies based on Environment, Social & Governance (ESG) criteria, you would end up with a small set of companies to base a portfolio on.”
Satrix’s ESG offerings provide global exposure, across developed and emerging markets, which are much larger investment universes.
“ESG is an approach that allows investors to express their views, and we have adopted an approach where the strategy provides a very similar experience returns wise to what a client would have achieved by tracking a broad MSCI World or Emerging Markets index. In addition, our ETFs reduce the carbon intensity of the portfolio by at least 30 per cent.”
For Williams, what is interesting is that in emerging market ESG investment, there is often a pick-up in returns due to the additional quality or mitigation of risk once ESG factors have been applied.
South African regulators require retirement fund members’ savings to be invested sustainably, along with considering ESG issues.
“Whether it’s a pressing issue for retail investors remains to be seen,” he says. “But these products are also well suited to an institutional type of client. Asset managers are directing increased focus on ESG in response to client demand.”
Recent years have seen some failures in governance in the South African market which have highlighted the need for an increased focus on ESG within the investment process.
“Part of the solution is to reward companies by allocating more to those that are doing well from an ESG perspective,” Williams says.