The Democratisation of Capital and Investment ETFs – a key to provide access to all Nerina Visser CFA LeaderEx – August 2016

Disclaimer

• This presentation is intended to provide general information regarding the [the basics of Shares and Investing], and is not intended to, nor does it, constitute investment or other professional or financial product advice and is not intended to be used as the basis for making an investment decision. It is prudent to consult professional advisers before making any investment decision or taking any action which might affect your personal finances or business.

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3

The Tragedy

97% of people never achieve financial freedom

Two out of three people will rely on their children to support

them financially

Less than 3% of the population will be able to stop working and

lead the quality of life they had hoped for

Most people worry their money will run out before they die

4

Who has the power to change this?

Money doesn’t solve Money problems

Financial literacy solves Money problems!

30 minutes – 3 key principles

• Difference between saving & investing

• Why “passive” is above average

• Using Exchange Traded Funds

to structure

Efficient Transparent Flexible

investment portfolios

Let’s talk saving vs. investing

Saving vs. Investing

• Saving

• Money that you plan to spend at some future date

• Key requirement is capital preservation

• Investing

• Acquisition of assets that can generate an income in future

• Key focus is on capital growth

Savings in the bank

• R100 in the bank

• 5% interest rate p.a.

• After one year you have R105

• Nothing more – Nothing less

• But inflation is >6%, so your money is now worth less…

Savings in the bank

-60

-40

-20

0

20

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80

100

12019

67

197

0

197

3

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9

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8

199

1

199

4

199

7

200

0

200

3

200

6

200

9

201

2

% p

.a.

Inflation Cash

Source: JSE data; etfSA calculations

Investment in the stock market

• R100 in the stock exchange

• 20% rate of return p.a. on average*

• After one year you have R120 on average

• BUT

• In a bad year you could lose 20% → R80

• In a good year you could get 35% → R135

* Last 50 years

-60

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0

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12019

67

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1

199

4

199

7

200

0

200

3

200

6

200

9

201

2

% p

.a.

Inflation Equities

Investment in the stock market

Source: JSE data; etfSA calculations

Last 12 months

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0

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12019

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1

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4

199

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0

200

3

200

6

200

9

201

2

% p

.a.

Inflation Equities 2yr Ave 3yr Ave

How do you deal with this volatility? The power of “time in the market”

Source: JSE data; etfSA calculations

-60

-40

-20

0

20

40

60

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12019

67

197

0

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1

199

4

199

7

200

0

200

3

200

6

200

9

201

2

% p

.a.

Inflation Equities 2yr Ave 3yr Ave 5yr Ave 10yr Ave

How do you deal with this volatility? The power of “time in the market”

Source: JSE data; etfSA calculations

Using “passive” investments to buy “the market”

What is “passive” investment

Passive investment = Index tracking

“Index tracking” means “following a recipe”

To bake a cake, your recipe specifies

the ingredients and quantities

What is an index?

• An index reflects the average performance of a basket of shares

• South African equity market as a whole (FTSE/JSE Top40 or SWIX40 index, S&P SA Top50 index, etc.)

• Global equity market (MSCI World index, FTSE All World index, etc.)

• Can measure different types of assets:

• Equities Commodities

• Bonds Currencies

• Listed Property Cash (money market)

What is average?

Perception of “average”

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25

% T

ota

l Ret

urn

p.a

.

All available equity funds

Index return Index tracking

fund return

How well do actively managed funds perform?

% of active managers who failed to outperform their benchmarks (broad-based market index)

1 year 3 years 5 years

USA 86% 76% 89%

Europe 83% 76% 82%

South Africa 84% 82% 85%

Source: S&P Dow Jones Indices (SPIVA Scorecard) – June 2015

Reality of “average”

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-5

0

5

10

15

20

25

% T

ota

l Ret

urn

p.a

.

All available equity funds

What is average?

Index return

Index tracking fund return

Vote ETF for equal investment opportunities for all!

Exchange Traded Funds 101

• What is an ETF?

• A package deal

• A box of chocolates

• A hamper of goodies

• What is in the ‘hamper’?

• Different types – Christmas, Valentine’s Day, Back-to-School etc.

• Every ETF has a ‘theme’, e.g. Resource stocks, High dividend stocks, Inflation-linked bonds, ‘Green’ companies, Physical gold, etc.

• Theme is defined by the index that the ETF follows / tracks

What does an ETF represent?

• A portfolio of shares, listed on the Stock Exchange (JSE)

• They are next generation unit trusts, using modern technology and practices

• They trade & settle just like any other securities on the JSE

• Intra-day live NAV pricing

• Electronic share register (STRATE)

• They are index-tracking (or “passive”) portfolios of shares

Why ETFs are “good for you”

• E for Efficient – index investment is

• Low risk (fully diversified)

• Beats 85% of all active investment products worldwide

• Is extremely low cost (high costs of investment is your biggest enemy for future financial independence

• T for Transparent

• You know exactly what you are investing in

• F for Flexible

• Easy to understand and use

• Suitable for small or large investment amounts

Let’s talk costs

What makes an ETF less expensive?

• The ‘package deal’ allows for economies of scale

• There is only one ‘wrapper’ (plastic bag), only one transaction

• Nobody is paid to make investment decisions for the fund

• Significantly lower portfolio turnover, and thus transaction costs

Using ETFs in Investments

• Single or multiple ETFs can be used for lump sum or debit order investments

• ETFs are building blocks that can be used in any type of investment portfolio

• ETFs can be purchased through:

Stockbrokers

LISP platforms

etfSA Investor Scheme®

Advantages of using the etfSA Investor Scheme®

• Lump sum investments from R1000

• Debit orders from R300 per month

• Automatically reinvests dividends (four times a year)

• Very low brokerage rate (0,08% +VAT)

• Sliding scale administration fee (0,4% - 0,65% p.a. +VAT)

• Facilitate third party investments

• Ideal for Investor Clubs / Stokvels

• Can view accounts online at any time

www.etfsa.co.za

• Invest in index products (ETFs), not individual stocks

• Invest in multiple asset classes (equities, bonds, property, commodities)

• Invest in different sectors, geographies, currencies

• Invest in various product “wrappers”

• Tax Free Investment Account

• Retirement Annuity (RA) Fund

• etfSA Investor Scheme® (discretionary investments)

Just INVEST!

In Conclusion

Question time

Want to learn more? Join us for a free seminar at the JSE on 30-Aug at 18:00

etfSA Contact Details

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Discretionary Investments 011 274 6170 info@etfsa.co.za

Tax Free Investment Accounts 011 274 6170 taxfree@etfsa.co.za

Retirement Annuity Funds 011 274 6176 rafunds@etfsa.co.za

Living Annuity Funds 011 274 6176 lafunds@etfsa.co.za

Portfolio Management Service 011 274 6174 portfolios@etfsa.co.za

Mike Brown Managing Director 011 274 6171 mikeb@etfsa.co.za

Nerina Visser ETF Strategist 011 274 6173

nerinav@etfsa.co.za

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Twitter: @etfSA @Nerina_Visser