Next week, Satrix will list a new exchange-traded fund (ETF) – its sixth this year.
The Quality SA ETF reminds me of the kind of investment that grandparents would buy their grandchildren – those “blue chip” shares that the child would keep until adulthood, knowing that the company would always be around and would deliver reasonable growth.
This is not the type of fund for investors who want to bet on the next best thing or take a more aggressive approach to investing – it is about steady growth over time, perfect for a child who has time on their side.
The ETF tracks the S&P Quality SA index, which looks at three key measures to determine the quality of the business:
Return on equity: This indicates the profitability of the business. The more profit or higher margins, the better the long-term returns.
Financial leverage ratio: How much debt does the company have? A company with a lower gearing/debt is more likely to weather economic downturns.
Accruals ratio: This is the quality of the company’s earnings, which are made up of cash flow and accruals. Earnings that are generated out of cash flow are considered to be of a higher quality as accruals can be subject to accounting manipulation.
The index is currently made up of 24 companies, including Tiger Brands, Mr Price, Bidvest, Capitec and Standard Bank.
What is interesting is that it does not include Naspers, which makes up about 25% of the Top 40 Index in terms of weighting.
According to Jason Swartz, head of portfolio solutions at Satrix, Naspers did not meet the criteria for the Quality Index.
This means that, for those passive index investors who are worried about how much exposure they have to Naspers, the Satrix Quality SA ETF could offer a good alternative.
Swartz says the rationale of investing in good quality companies is that, over time, they deliver sustainable performance.
“How well an equity portfolio performs during down markets, relative to broad benchmarks, is very often a determining factor for whether the portfolio outperforms the benchmark over the long run,” he says.
“By investing in quality companies that tend to be more sustainable in difficult markets, the focus is on downside protection, which increases the probability of superior long-term, risk-adjusted returns.”
This is definitely a fund to consider for your child’s tax-free savings account – or your own.
The graph shows how the S&P Quality SA index performed against broad market indices over time.
BENEFITS OF TAKING UP THE IPO
Investors have the opportunity to be the first to invest in the new ETF in the initial public offering (IPO), which opened on September 1.
Participating in the IPO means you pay no brokerage fees on the initial investment and you will participate in the performance of the ETF from the first day it trades on the JSE.
Investors can access the IPO via the SatrixNOW.co.za platform, where there is no minimum investment amount and no annual platform fee.
It is also available on other transacting platforms such as the Satrix Investment Plan, etfSA, EasyEquities, iTransact and Standard Bank online, to name a few.
If you already have a personal stockbroking account, simply contact your broker to invest.
The anticipated date of listing on the JSE is Tuesday.