Exchange Traded Funds Presentation20 April, 2011

Disclaimer

• I am NOT a registered financial advisor.• I am not paid any commissions to sell ETFs.• I am paid to write an ETF column by Investors

Monthly.• I am paid to write a quarterly ETF Review for

Itransact.• This presentation should NOT be construed as

advice or a recommendation of any kind.

In case you prefer to shoot and ask questions later

Warren Dick

• Degree in economics and finance from UNISA• 7 years at Investec Private Bank• Financial journalist writing for Investors Monthly• Financial analyst for Investorcentre• Called the financial crisis of ‘07/08 • Blah blah blah

Some call me slim....

The most important slide you’ll ever see

Stock markets generally tend to go up....

JSE All Share Index 1960 - 2011

Source: Profile media

Exchange Traded Funds

• A basket of shares, bonds or commodities.• Put together in a methodical way.• Listed on an exchange.• Use indices as their building blocks.

What are they?

Some famous indices:

• All Share index: Tracks the performance of 161 shares on JSE.

• Consumer Price index: tracks the change in the prices of a basket of goods.

• Dow Jones Industrial Average – NYSE.

Pick one you like

Indices are everywhereAnd ETFs aim to mimic them!

ETF Structure

ETF Issuer: eg RMB

Regulated by:• JSE as a listed

entity• FSB as a collective investment scheme

Man company usually a Pty Ltd.

Appoints:• Trustees (Bank) to

administer company• Asset manager to track the index being

followed• Market Maker to

provide liquidityInvestors purchase and

sell debentures/PI’s through JSE

Issuer creates Management Company

Issues: Debentures or participatory interests

Market Maker ensures shares

trade at NAV

How are they constituted?Market Cap Methodology

Include shares in the index based on their

Market capitalisation=No of shares x share price

SIZE

Anglo American Market Capitalisation

Closing share price 19 April: R342.70No of shares: 1,342m

Market cap = R342.70 x 1,342mMarket cap = R460.2bn

Top 40 index: ranks companies on size

The Top 40 by IndustryA little skewed to resources…

Basic Resources; 42.98%

Consumer Goods & Services; 22.38%

Financials; 17.50%

Healthcare;

0.79%

Indus-trials; 2.90%

Oil and Gas;

5.84% Telecoms; 7.61%

Source: Satrix, Investorcentre

So then its a process of natural selection?

• Companies enter and exit the Top 40 when portfolio is rebalanced

• Only the strongest survive• This is a process of

‘natural selection’ • Don’t buy the needle buy

the hastack.

We’ve heard this before!

And has been replicated on indices around the world:

• Locally: industrial companies “Indi”, resource companies “Resi”, financial companies “fini”

• Overseas: FTSE 100 (Footsie) S&P 500, Nikkei

Then they got smart…

• Instead of picking on size, you pick on value (fundamentals)

• Research Affiliates Fundamental Indexation (RAFI)

• Enhanced Research Affiliates Fundamental Indexation (eRAFI)

eRAFI vs RAFIRAFI (Satrix) eRAFI (ABSA Capital)

1. A company’s Book Value2. A company’s Sales3. A company’s Dividend4. A company’s Cash flow

Applies a further two SA specific criteria:Net Operating Assets ratioDebt Coverage ratio

Is rebalanced annuallyScreens all companies on the JSE

Is rebalanced quarterlyOnly selects companies from the Top 100.Charges a performance fee when it beats index

On this team, we fight for that inch. On this team, we tear ourselves, and everyone around us to pieces for that inch. We CLAW with our finger nails for that inch.Cause we know when we add up all those inches that's going to make the f%$*ing difference between WINNING and LOSING between LIVING and DYING.

Performance:Making rands and sense of it…

Equity Funds Ranked TER (2007-2009)

Funds Average TER Total Return (%)

5 Most Expensive Funds 2,97 10,88

10 Most Expensive Funds 2,65 15,67

Overall Average 1,59 14,89

10 cheapest Funds 0,92 19,19

5 Cheapest Funds 0,72 21,35

Source: DRW Investment Research (November 2010)

“Investors will do well to avoid the most expensive funds; simply because their actual performances do not justify the higher fees. Investors should rather, all else being equal, invest in low-cost funds and therefore stand a better chance of improving their returns.”

Equity Unit Trusts versus the Benchmarks

Equity Funds 1-Year 3-Year 5-Year7-Year 10-Year

Number of funds 97 83 6350 38

Best performing fund 26,0% 14,5% 18,5%

24,5% 29,9%

Worst performing fund 1,0% -11,7% 8,0%

14,7% 13,3%

Top quartile 20,6% 6,8% 14,5% 20,7% 20,2%

Median 18,3% 5,1% 12,9% 19,5% 17,8%

Bottom quartile 16,5% 3,1% 11,4%17,9% 15,8%

Average 18,2% 4,8% 12,9% 19,5% 18,4%

Benchmark: ALSI 19,0% 6,5% 15,2% 21,0% 18,1%% Funds outperforming ALSI

37% 33% 15% 26% 49%

Benchmark: SWIX 20,9% 7,1% 15,1%21,6%

% Funds outperforming SWIX

22% 16% 12% 15%

1. Equity unit trusts in categories: General, Growth and Value Funds2. Total Returns Annualised3. Source: DRW Investment Research

Fees (TER) as at 31 December 2010

eRafi

INDI

eRafi

Fini

eRafi

Resi eRafi

NewSA

Shari

ah To

p40

DB X-Track

er DJ E

uroSto

xx 50

DB X-Track

er FT

SE 100

DB X-Track

er MSC

I Japan

DB X-Track

er MSC

I USA

DB X-Track

er MSC

I World

Proptra

x

Satrix

RAFI

Satrix

RESI

Satrix

40

Satrix

DIVI

Satrix

FINI

Satrix

INDI

Satrix

SWIX

NewRan

d

NewGold

Inflation-X

Zshare

s GOVI

BIPS40

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

3.08%

2.09%2.08%

1.74%

1.43%1.37%

1.00%1.00%

1.00%1.00%

1.00%

0.75%

0.54%0.51%

0.47%0.45%

0.45%0.45%

0.45%0.44%

0.40%0.39%

0.34%0.29%

But don’t take my word for itThe Oracle of Omaha says so….

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.“

- Warren Buffett in letter to shareholders, 1996

Your guide to the universe…

As at 31 December 2010

ETPs - a big deal overseas (US$ bn)

--------ETFs ---------ETPs Equity ETFs Fixed Income ETFs Commodity ETFsSource: Bloomberg, Blackrock

But still small locally (R’bn)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2.75 3.584.73

5.61 6.04

9.18

12.0213.38

16.52

27.51

33.3

Source: Bloomberg

Summary:

• Market cap indices are based on the size of the companies.

• Fundamental indices introduce different ways of picking the shares.

• You can get exposure to all asset classes locally.

• ETFs are cheaper than unit trust funds

Getting some more of the good stuff

Now that you’re sold: ETF column in Investors Monthly (Business Day)Factsheets of product providers.ETF Quarterly Review – sign up for the email.ETFSA website

THANK YOU