Speaker 0:
Hello and welcome to this indexation, Master class. I'm joined today by Ryan Baso, head of Index Portfolio Management at One Invest Kingsley Williams, Chief investment officer at

Speaker 0:
and Annalisa Balfour, portfolio manager at the Old Mutual Investment Group. Welcome to you all. Thanks, Chloe. So, Ryan, I'm gonna kick off with you. What are some of the key milestones that we've seen in South Africa in the history of the indexes on the J S E.

Speaker 0:
So, I mean, there's there's there's quite a lot of them. So I'll I'll just touch on the key ones and give or take a year or two? Yeah, I don't know. I might not hit the spot right to the exact year, but, uh, just going back to initially when the J C. Listed that was probably around the late 18 hundreds. In fact, um, and it was, you know, amongst the the Gold Rush, and whilst that was going on, we actually had the the old faithful Dow Jones in this index also listed around the same time as the J. C. Was created.

Speaker 0:
Um, and then we had a few a few company listings from that period up until around 1980. I think it was 1978 if I remember correctly, um, that we had the first indices come to the market and those were were tagged along the, uh, J C a, uh, index range. Um

Speaker 0:
uh and then so on, moving on from there, give or take a few company listings or big company names listing between then and two listed, uh, we had the big milestone where footie J S E came together to form the footsie J s E Africa, uh, index series. And that happened in 2002.

Speaker 0:
Uh, a few years later, the swigs came into into the four. Uh, I think that was around 2004. So uh, and then it was pretty quite since then and then, More recently, recently, I'm talking within the 5 to 7 year ban.

Speaker 0:
Uh, you know, we then saw the changes made on on the company or the way NASA's process was being viewed on the group company, Uh, a group entity capping rather that was introduced on for G E.

Speaker 0:
And and then the most recent one, and something that's gonna impact the market quite significantly now is with the the down waiting in on or C f r a. Uh, that's happening now and now, in June. So we're gonna see some big changes happening around that corporate restructuring, Uh, big down, waiting, coming in to the top 40. So I think that's the next big milestone or key event. That's that's gonna happen. Uh, next month.

Speaker 1:
Um, just to add on to what Ryan has said on the evolution of the indices, um, you would have to first distinguish that there has been, which is the all share index. And the Swiss index, which is, um, has been taken into account the straight register shareholdings only, whereas the old had grandfather companies, uh, and grandfather companies would be companies that had their origin in South Africa through the evolution of time

Speaker 1:
and then found to, uh, gone listed in, um, European markets to get better sources. Sources of, um, of investment, uh, investments, Um, so because they've got their origin in South Africa, then they considered grandfathered, but it would have been, um, it's not all companies as they go listed. It was what has been previously in the index that they would be considered grandfathered, so any company that then lists after is not considered to be grandfathered.

Speaker 1:
Um, what you would see is that between the two indices, the old and the old share because of the corporate events that have happened in the investing companies, uh, you are actually seeing an amalgamation or sort of a merge over time between the methodologies where the only distinction is coming in from C F R. Which, um, um, Ryan has mentioned and what you will see, Uh, companies like old mutual B H P Billiton have had corporate events or consolidations and

Speaker 1:
things that have actually resulted them no longer being eligible to be considered grandfather companies. And those two methodologies have actually are now different in in just a few holdings. And the big move that Ryan has spoken about of, um, the changes that will be coming into effect in June.

Speaker 0:
So, Kingsley, it seems as though this evolution of of the indices in South Africa has has really evolved to present new indices such as the the or share index. Perhaps you can elaborate for us. I was just fascinated to hear Ryan's summary going way back in history, and it reminded me of, uh, when I first joined,

Speaker 0:
Not not that far back. But when I first joined, uh, the the investment industry, it was about, uh, 2007, 2008. And,

Speaker 0:
uh, some of the colleagues who'd been in the business before me were speaking about how before the footsie J S C indices came to our market, uh, they used to have to calculate their own total return indices because they weren't total return indices. So, in other words, your fund would outperform the index because you were getting those dividends and reinvesting them.

Speaker 0:
And so to get a like for, like, comparison, you had to manually calculate a total return index because there just wasn't one. So that was some of the other innovations that were brought about with J. S E. Uh, coming, coming to our market. Um, but yeah, there certainly have been numerous other indices that have been added as well. So what we've been speaking about now all market cap weighted indices, In other words,

Speaker 0:
the size of each company in the index is essentially a function of the share price and the number of shares in issue that are publicly traded.

Speaker 0:
Um, but you don't have to wait companies in an index. That way you can use any dimension that you want to wait companies, whether it's, uh, um using some fundamental measure or the dividend yield or, um, an indication of its momentum or, you know, you can the the There's literally no, uh, limit to how you want to construct an index and that essentially has opened up and revolutionised the way in which

Speaker 0:
index tracking, uh, products and strategies and funds can be brought to market because they are no longer confined to just market cap weighted strategies. You can have a very, very wide range of different, uh, investment strategies and anything I mean at we refer to anything that's not market cap weighted as being non vanilla and anything that is market cap weighted as being vanilla. I think when most investors or clients talk about,

Speaker 0:
um, index tracking or passive investing, they they typically referring to vanilla or market cap weighted strategies. But there's a whole another subset of index investment strategies that are outside of that vanilla space, which offer interesting investment opportunities. I actually I actually see the any index as you know, a real a rules based strategy, a systematic way of approaching constructing a fund.

Speaker 0:
So it's not just passive or, you know, uh, you just do whatever you're told and there's not much effort behind it. Uh, it is actually a portfolio construction method is the way I see it, uh, there's rules in place that take into consideration, uh, liquidity trade. As mentioned, there's there's size. Uh, there's indices that are price. We like the big Dow Jones, for example.

Speaker 0:
Uh, their screening philtres like we've been talking about, uh, from a shareholder register. A weighted point of view. Uh, I actually see it as a robust set of rules in order to construct a fund. Uh, just like any active equity fund as well would be constructed,

Speaker 0:
uh, and at the end of the day, it is then how you bring all of these various funds together to construct an overall portfolio for for the industry? Absolutely. So I think Ryan's really explained the fundamental concept of what indexation is. Um, but how does this do, in your view, differ from

Speaker 0:
active strategies? And then perhaps you can also touch on some of the guiding principles of what defines a good benchmark.

Speaker 1:
OK, I think in terms of how uM index diff indexation differs from active managers is that, uh, an indexation manager would be seeking to replicate a benchmark, uh, would be seeking to replicate an index. Um, they would do it

Speaker 1:
a rule space they will follow in an index that is specified in time and specified in advance. It's measurable. Um, it's an investor. It's got investable characteristics. It's not just, um, pulled up from the thumb, and then you can't invest into it. There's enough liquidity for the whole market, and it's sort of a a representative of the of the full market of a sector

Speaker 1:
or a style. Um, whereas in active management, it's a view of the manager, whether they value investor, they a quality investor or and what? How they are trying to, uh, beat the market, taking advantages of of of opportunities. Um, here and there, uh, such that they've got an active return relative to the index or the benchmark, Um, I think in terms of like, uh, having a good benchmark, it's very important that the,

Speaker 1:
um, index constituents there's liquidity in them. There's enough, um, market cap coverage that the whole market would be able to invest. It's not just, um, a few stocks here and there, and they are representative of something way in advance. You're able to measure it. Um, that would be some of the characteristics of the good bench, but I'm sure my colleagues would have something to add on there.

Speaker 0:
I'd like to just add one other defining feature that distinguishes or should distinguish an actively managed strategy from anything that you can implement via an index, particularly if you start looking at a non vanilla index and you look at a fund in a point in time tracking that index,

Speaker 0:
it is going to have active positions relative to, uh, the broad market index. So arguably not in any way differentiated from an active strategy. So what, then, is the difference? Well, I think the difference is that an active manager will opportunistically trade and exploit opportunities and not necessarily within the confines of strict rules like Annalisa was referring to. So it's having that freedom to opportunistically

Speaker 0:
unlock, uh, value that that should really define what active management is about because

Speaker 0:
it's no longer just that. Indexing is market cap weighted. It can represent actively positioned strategies. But the key difference is that those will be done in a systematic way in terms of when they rebalance and when they trade. Whereas an active manager is not confined to having to only trade at a particular point in time.

Speaker 0:
I think that also speaks to the one more character is is a robust governance around, UH, an index or a benchmark is you shouldn't be able to chop and change the rules when it suits you when a style changes, Uh, and I think that is probably one of the key reasons why indices were initially developed as as benchmarks.

Speaker 0:
So even I know I touched on like when the Dow Jones was initially listed. But actually before that the Dow Jones Industrial Average Index there was a the first one was, uh, the Dow Jones Transportation index, and that was initially brought in as a benchmark. Uh, it was, uh, the the The industry needed something to measure themselves against something to to find the right price discovery and the right benchmark,

Speaker 0:
Um, which is where indices started, started as benchmarks and and similarly where we are now uh, in my opinion, where we've seen various style indices exist so you can get a a value index or resource index, for example, or an equally weighted index. Um, I think a lot of it came in as as benchmarks, because active managers need to be measured against something, Um, and as well. As as Lee alluded it, it has now become such

Speaker 0:
a clear, rules based strategy. Uh, like any. Any broad strategy where there's a lot of alpha to be made it it will attack, crowding. And then once that alpha is crowded or traded out, you, then it then becomes an index, it becomes the market to say so. King, I know you've mentioned this vanilla and non vanilla indexes, and I think value indexes equally weighted indexes. I think there's a ple plethora of of different indexes, um, in our market.

Speaker 0:
What then do you believe are the advantages and disadvantages of, um, a market cap weighted index?

Speaker 0:
Sure. Um,

Speaker 0:
I think

Speaker 0:
you know,

Speaker 0:
one of the criticisms often levelled at a market cap weighted index is that you've got this over exposure to your largest businesses

Speaker 0:
and, you know, they are one of the reasons they may be large is that, uh, their price has been bid up and might be trading at a premium to the fundamentals. So essentially you now could be investing in expensive companies and have a portfolio that's tracking expensive companies or has the largest proportion of its weight in expensive companies and is therefore underrepresented in cheaper companies, which would have a smaller weight in the index. So that would be one of the criticisms. Um,

Speaker 0:
I'll come back to that point, though, Um, and I think the other criticism is particularly in a concentrated market and a smaller market like our own.

Speaker 0:
Uh, you might have excessive weights, uh, to one or two companies where there's a big skew, and we've certainly seen that in the past in our own market, with n SPS dominating and at various other points in history, other companies making up a you know, having a significant weight in the index relative to the rest of the market. So those would be some of the criticisms, I guess, to counterbalance that, Um, what we have seen is that market cap weighted indices through time,

Speaker 0:
uh, do represent the market holistically, uh, and the aggregate. And when you start looking at funds on a net of fees basis and index funds tracking those market cap weighted indices, you find that those benchmarks are quite difficult to beat. So in other words, it ends up not being at the median or the 50th percentile, where your active managers are positioned relative to that, they typically it's outperforming, uh, 60 to 70 if not more, uh percent of of of, of available funds in a category,

Speaker 0:
uh, the other.

Speaker 0:
The other benefit that market cap weighted indices have is that through a very simple capping mechanism, you can deal with that concentration concern. Um, and that's what the J S C has implemented with a number of its indices. So you've got an all share index, But then you also got a capped all share index, or SWI index and a cap swi index so that deals and provides a layer of protection that you're not ever gonna have excess concentration in any one name. I guess the liquidity aspect as well

Speaker 0:
it's you probably have better liquidity in if you're trading large size in a market cap weighted index than trading. An equally weighted index. That puts a lot more weight to some of the smaller stocks, which perhaps may not have as much liquidity in the market. But but just sorry just to hop on this point a little bit more. Um,

Speaker 0:
I do think where the market will move on from here. And as we're seeing a lot more of these style based indices come to the market. Uh, is that market cap weighted indices will just be seen as a style or a type of of investment, like it initially started off? Uh, you know, in in the US or under the farmer and French models, where large cap or small cap was actually a a factor and and which is what a market cap index is? It's a large cap based index.

Speaker 0:
So, Ryan, you mentioned something interesting there factor, Um based indices Annalisa What are the key characteristics of these factor based industries? And how would you implement, um, an index tracking solution with the use of, uh, a factor based index?

Speaker 1:
OK, I think, uh, Ryan has already started on the farm and French model in terms of, um, just a definition. Whether its value indices, its momentum its size, Its quality.

Speaker 1:
Um, those were the general. But as to what value is, each manager can define it differently. Each index provider can define it differently.

Speaker 1:
Um, what they're very much useful for is in a in a portfolio, clients could look at as as a way of diversification if they've got active managers and they feel like, um, there's they skewed to one style or they skewed to another they need could add in a factor to bring in a factor in this in investing in a factor in this to bring that factor into their overall portfolio,

Speaker 1:
they could, uh, add into, um in a sense of completion if they want to get exposure throughout throughout all the factors but by the using active investors, they're saying that they don't have exposure to that factor. Then they can get in in that, uh, factor via the index. Um, and then you can also use the factor as, um, just to, um

Speaker 1:
to get an alpha, uh per perspective rather than just bitter exposure. Um, because these factors have been seen to outperform over time in the long run, uh, relative to the market, and I think the farm and French model has been able to say, um, where the active performance of even the active managers is coming from is based on the style exposure that they have. Um, so,

Speaker 1:
um, you could use the indices, uh, the the factor indices in themselves either for diversification, for completion of the factors as, um, a risk model just to adjust your risk or as a way, a way of adding into the alpha that your portfolio would like to see.

Speaker 0:
OK, I think that was quite a comprehensive, uh, explanation of how these factors are brought into, um, an indexation strategy,

Speaker 0:
but now touching on trends. So, um, Kingsley, what are the local and global indexation trends that you've been observing? And perhaps, um, that your colleagues have been observing?

Speaker 0:
Sure. So in 2022 in the US, uh, the indexation strategies within the equity market specifically surpassed, uh, the share of the total market, uh, to now be the majority of assets are now invested according to some sort of rules based or indexed strategy, whether vanilla or non vanilla.

Speaker 0:
Um

Speaker 0:
and so we've seen rapid growth take place in that market, leading the global, the global market. Um, in Europe, we see, uh, take up of indexation strategies, sitting somewhere between 20 to 25% across both ETF s and index funds.

Speaker 0:
And in our local market, the often quoted stat is that we're at about a 7% adoption rate.

Speaker 0:
Um,

Speaker 0:
but that's probably doing a little bit of a disservice to the amount of adoption that you'll see in indexation, depending on the asset class you look at. So we did a little bit of interesting work, just looking at all the equity the as ISA equity categories. So everything listed, you know, everything with local equity. Uh, you know, everything that gives you exposure to local equity. And I'll touch on that where that's becoming a little bit blurred now with the R 28 changes in a moment. But,

Speaker 0:
uh, if you consider those categories where all of the funds are classified within those categories, and then you look at what share of, uh, the ETF s and index funds make up, uh, in those respective categories, you get to a number that's closer to 15%. Um, so in other words, you're looking at all J s E listed instruments in those respective categories and funds tracking indices on the J S C. Which is where indexation has really gained its most. You know, its biggest foothold is in listed equities,

Speaker 0:
uh, and list of property. So we're also seeing rapid growth take place in our own market, not to the same degree of adoption as we're seeing overseas. But we're certainly following that trend.

Speaker 0:
So the other thing that we're also interest, uh, observing, which is quite interesting is, uh, the amount of take up of rules based or indexed balanced funds. Um, so this is now outside of the equity as IA equity categories. So these are multi asset balanced funds. And interestingly, over the last 12 months, 50% of flows, uh, are going into rules based or indexed balanced funds.

Speaker 0:
Now, these are the categories that have typically dominated the assets within our local market. Most investors

Speaker 0:
use a balanced fund to save for retirement, for example, in order to meet rate 28 requirements. And we've seen quite a shift there in terms of assets flowing into rules based or balanced index funds. So that's a that's quite a significant change and, you know, at at 50% of flows that that really does give you an indication of where the money is moving. Even though the percentage take up of the assets in those categories is also relatively small at this stage,

Speaker 0:
I'm actually quite excited about that. Because if looking back at what some of the numbers have told us as well, um, is that your 80% and a growing 80% of your asset of your portfolio returns is generally driven by macro factors macro data, macro events, um, asset class returns rather than single stock picking.

Speaker 0:
Uh, and And with what you mentioned, Kingsley, I mean that that says that investors are starting to put their money where they're gonna get most bang for Buck. And I spend your time on the portfolio construction piece and spend your effort over there and gain

Speaker 0:
your asset class exposure via your your index tracking building blocks. So, Ryan, perhaps, um, just to continue your point, what do you then believe? Um, you know, should this growth in indexation be viewed as a positive or could we be seeing a market bubble forming?

Speaker 0:
Jeez, that's, uh, yeah, that that's quite a debated one. We've we We had this at, uh, another investment forum where one of the active managers also mentioned the word, uh, passive bubble. And he obviously got everyone, uh, tied up in a knot. But, um

Speaker 0:
uh, I've got a couple of thoughts on that, uh, Chloe, So

Speaker 0:
I think the first one being that as King mentioned in the S a market, that number is well off this passive bubble quoted number where we're seeing about 50% in the US so comparatively we know we know it closely on the S a market side.

Speaker 0:
I think that this trend has been coming for a long, long time.

Speaker 0:
Uh, this passive bubble quotes active managers. Getting worried about this passive bubble should have been something on their radar 10 years ago. I think that it's probably been thrown around now because maybe it's starting to to eat into their lunch. But anyway, theories aside, um, I do think that it's a good thing for the market. A growing trend in indexation or passive, uh, is that firstly, it does allow for,

Speaker 0:
um, the market of the industry to weed out any underperforming actor managers. So If you look at any stats out there, whether it's your SNP a stats, et cetera, they'll tell you historically through time, Where has where has an actor? Where has the actor management industry outperformed a benchmark index that they put out? And it's It's for majority of the time it's been well below or or basically 30%. Uh, if I round it up that have outperformed, uh, a passive benchmark,

Speaker 0:
so I think it will make choice easier. As indexation grows, it makes choice easier for the investor to then select that 30% of the active managers that that outperforms because, apart from, uh, there's a small number of them. It's about an investor consistently picking that through time, and you see variability of funds in time actually outperforming. So I think that the growing trend of indexation does make the choice easier for for an investor at the end of the day.

Speaker 0:
And Alisa, perhaps you can elaborate, Um, and can you perhaps comment then on the changing local market landscape? I know that Kingsley did mention that we do have quite a concentrated local equity market, and that might make indexation a little bit more challenging.

Speaker 1:
Um, that's true. I think, um, what we are seeing in the local market as well, just from the investors that we have has been a lot of interest in terms of how do they gain access to the global indices, Especially with the change and the interest of the regulation 28 offshore allocation. Um, and I think in,

Speaker 1:
um, with that, then it gives the investors, um, an opportunity to either bring in style indices to either bring in E S G to bring in a variety of things rather than just a market cap. I think some of the challenges with our local market being so concentrated looking at 100 and 30 140 stocks is that it becomes hard to actually either allocate to you looking,

Speaker 1:
you're going to be eliminating things via A S. G. Um, there's liquidity in terms of the small cap stocks that are in the in in the indices, where sometimes it can be hard to get into those stocks. And a skilled indexation manager would then find trading strategies in terms of how do you gain access and be able to still track the market very closely

Speaker 0:
So Kingsley, perhaps. Have you seen an indexation bubble recently? And what have we Why has there been such a growth in indexation both globally and locally?

Speaker 0:
Well, I think it, you know, just to echo what Ryan has already said it. It's obviously a net positive for investors to make the market more efficient, to give investors more choice, uh, to efficiently express their views. And I think that's how indexation should be viewed as a tool to express active investment decisions. There is. I don't believe there's any such thing as passive investing. You need to make active decisions at each stage in the investment journey.

Speaker 0:
But in terms of the notion of a bubble, I think we've touched on it at various points through our conversation.

Speaker 0:
I think

Speaker 0:
for you to consider that for there to even be a bubble, you would have to view indexation as being this homogeneous thing.

Speaker 0:
As in, if you're tracking an index, it is all market cap weighted. Everything is invested according to the size of a company. And as we've explained in our discussion,

Speaker 0:
indexation is a lot broader than that.

Speaker 0:
Um, in fact, there was an interesting study done quite a few years ago where they looked at all the ETF s listed in the US. And if you add them all up, um, you know, some of them would have been set to ETF. Some would be thematic ETF. Some would capture factors. Some would be small caps. Some would be large caps, et cetera. If you put them all together, you end up not getting the market cap index, you get something else. So I think that again reinforces the point that, uh, indexation is a tool

Speaker 0:
that allows investors to express their views and take active positions on the market So it shouldn't be seen as creating a bubble. It's really just a reflection of, uh, what investors want to achieve in their portfolios and giving them an efficient means with which to do that. So then I guess one more thing on that point that you mentioned is,

Speaker 0:
uh, if if the bubble were to be true And if, uh, passive investing or indexation, uh creates inefficiencies in the market,

Speaker 0:
you should be seeing the trend as indexation was was going or taking more or taking over more of the of the active management industry you should have seen the trend of active managers actually outperforming indices going the other way because the opportunities would would exist from indexation bringing inefficiency in the market in order in order to pick stocks that outperform. But we haven't seen that which comes back to the point that it is in a bubble. It's actually creating more efficiency in the market.

Speaker 1:
I was also going to add on that. I do hope that because indexation is very linked to being a market cap, um, strategy and then But there are other options in which you go into that. It doesn't get considered that because tech companies have been doing well and they've been up weed in the market caps, um, in the market cap indices. And um, as a result might say there has been a tech bubble that becomes a reflection of the

Speaker 1:
investment in the investment or indexation itself, but rather what is happening in the in, in, in the in, in the indices and the construct of the indices rather than indexation on its whole in its um in its variety is in the is in the bubble.

Speaker 0:
The one other thing I'd just like to add, um, is that we should never discount the incentives that exists within capital markets to unlock opportunities and deliver excess returns and alpha to clients. And there are numerous players which have deep incentives to to unlock those opportunities and, uh, perform that price discovery role. Um, and so

Speaker 0:
it's not that it's indexation and nothing else. There is definitely a need for both. And the market will find a natural equilibrium on what that mix of strategies is between actively managed versus tracking an index. But even indexing itself can fulfil a price discovery function as active investors and active managers use indexed strategies to express their views. Uh, in a particular segment of the market.

Speaker 0:
So I'm gonna bring E S g in here, and I think that, um, e s G has been shaping or dominating a lot of conversations. Um, of late. Ryan, what are the different approaches to E. S G integration? Um, particularly within an indexation strategy.

Speaker 0:
Yeah, Chloe. So I guess there's a few different angles to look at it. Uh, you know, one would be

Speaker 0:
expressing a view at individual company level, uh, which is where we're seeing a lot of investment houses have specific analysts and specific teams being set up now to analyse each stock, particularly also, rather, analyse each stock from its ground up fundamentals. Uh, look at their accounting records and then calculate the numbers based on and I mean numbers in terms of the environmental social governments and create the rakings and the and the numbers based on that,

Speaker 0:
um, then there's a view that can be expressed on E. S G if, uh, you invest in an E s G rated index, uh, which we see a lot of index providers coming out now. And the G E has has recently launched one themselves. But I think what E. G is trying to achieve is a view that I guess governments pushing,

Speaker 0:
uh, regulation and governments down governance down to investors in order to force companies to steer their investment, steer their operations in a certain direction that then, you know, as as we all know then helps the environment help social economic factors, uh, creates a better governance within the company structures.

Speaker 0:
Where I've been having a problem with the way E s G has been done so far is, um I'm seeing it as a lot of fancy. And again, this is just my opinion, a lot of fancy accounting being done by companies in order to increase that E s G score in order to then attract more investment into the companies. Um, you know, you you probably would have heard this term called Green Washing. Um, my view on where E s G should go is if we really wanna want to back,

Speaker 0:
uh, this change that we we really have to put our money where our mouth is on this, um, and sorry to To to bring in a little bit of a product push, but i'll I'll be subtle about it is why we when we launched our e s g product last year, uh, we went the route of a social responsibility investment product.

Speaker 0:
Um, and that particularly will exclude a company not just down weight them in its benchmark. So So if you invest in tobacco or fossil fuels, et cetera, it completely excludes you. There's there's no messing around with it. Uh, so I think, in my opinion, that's how you'll have the most impact. Uh, so you're not You're not. You're not open to the fancy accounting, but absolutely so I think a lot of companies also approach more of a stewardship role where they would steward companies into

Speaker 0:
improving their E S G ratings. But, Annalisa, from my understanding, a lot of these E s G disclosures are voluntary At the moment. How do you create an index then? If these E s G metrics are purely voluntary and not not a requirement?

Speaker 1:
I think in terms of of, with our local listed space, we have got a limited universe. Um, So what you would need to do to create an index is you would probably be an estimation before, um Of what? Um, the E s G risks and opportunities that companies are involved in and

Speaker 1:
and create an index from that perspective. But I think we could push regulation to actually make um disclosures. Uh, compulsory, especially for the J. C listed, uh, companies. I think a way we make most impact is, uh, through stewardship, as as someone who invests in an indexation product or an in indexation, um, indexation strategy.

Speaker 1:
You do want to see the asset owner asset manager actually stewardship in engaging with the client client company um, identifying and sort of playing an advisory role that actually steers the the conversation. And it steers the

Speaker 1:
versions of the companies. If you're looking at South Africa in terms of, like, what are the major risks that we face? Um, we are very much climb, uh, carbon dependent, uh, through the electricity, either through the mining opportunities that are within the country. Um, this we're looking at a country that has got social inequality. We're looking at a country that has, um, got, um, a a huge pay gap. And those are things that is a country we need to to focus on.

Speaker 1:
And you Can I I I believe I'm of the view that in South Africa, if you divest from the big um E S G risks, then you create more of a problem either at employment at, because those companies that we have for your your Eskom, they employees to a number of

Speaker 1:
people in South Africa as they're supporting um, communities. So the active stewardship would be where I see that we should be actually engaging with the companies, keep on saying these are the things that we could change, and, um, even like just our transformation journey in terms of some of the level level,

Speaker 1:
uh, of B e e credentials. Um, our e s G team had in for, like, sort of, uh, engaged some of the companies to say How do you improve this? In terms of the sourcing and all of that? Those are things that I think are very important into E. S g integration for the local market.

Speaker 0:
I think that's a very important point that you raised. Uh, Annalisa is the holistic

Speaker 0:
view and approach and not to and not just ticking a box. As you mentioned. If you if you push companies in a certain direction, it then creates other issues and we've got to be honest with where we are in South Africa and if we are very much resource driven economy, we know that the e part is not gonna move a hell of a lot.

Speaker 0:
But maybe maybe we are more of our focus should be on the S and the G and where we can get bigger bang for our efforts, whereas now it seems like it's just kind of been diluted, and a lot of the responsibility is being pushed down to the investment managers rather than a big effort being made from the top,

Speaker 0:
in my opinion. So, Kingsley, it seems as though the transparency on E. S G metrics is still not voluntary yet. So are there some challenges that you perhaps see with some of these products that are coming forward? I know, um, Ryan has mentioned green washing, and that is a global, um, challenge when it comes to to, um, e s G products. What are your comments? Yeah. I mean, I think it's a well established fact that depending on the

Speaker 0:
E s G research provider, you use, uh, you could get very different ratings on a company. Um, and obviously, if those uh, e s G providers also an index provider, and using those ratings, you're gonna get a very different, uh, index coming out based on those ratings if it's constructed using those metrics, So it does represent a challenge. Um, but I think the the issue within E. S. G, and perhaps even more broadly under a sustainability banner

Speaker 0:
is that, you know, as index investment managers, one of our responsibilities is really to to give investors choice, um, to be able to express their views and not necessarily have a one size fits all. And we've certainly seen that amongst our clients that, uh, you know, some clients want E s g incorporated and others don't. But even within the clients that want E s g or some sustainability metric incorporated, there's a lot of divergence in terms of what you're trying to achieve.

Speaker 0:
So you end up going down the road of needing to be able to tailor your portfolio, to meet those specific and nuanced client requirements to achieve a specific objective. And I think that speaks a lot to democratising investing democratising markets more so that you can provide investors with a choice and a solution to meet their specific needs.

Speaker 0:
Thank you. I mean, where where we are in s a with

Speaker 0:
the the bulk of the population having very low saving space, I think, unfortunately, we we're gonna be in the situation where returns and growth and asset growth is gonna be, and savings growth is gonna be more important than than your E S G investments. And that's that is the reality of it. I think it's gonna be a long way down up until we have the luxury of focusing on on E S G over investment returns.

Speaker 0:
So, Ryan, just to continue. Now, um, what are some of the other themes I know? E s G is a very big theme, sustainability and the green future. But what other themes is the fourth industrial revolution now presenting? And what indexes have have come to the fore in response?

Speaker 0:
Well, I guess, uh, latching on to two themes I don't have to mention to anyone here about crypto and Blockchain technology. And and that seems to be where a lot of, uh, focus is on on grow on growing trends Rather, uh, and what that's gonna bring into the market and how that's going to change the environment. But more importantly, where that fits into your portfolio, um, I know currently with the F S C A. Um, they they are considering,

Speaker 0:
uh, Cryptocurrencies as an investable asset class, but but not yet made a decision in it. Or I don't know how close they actually are to making a decision. It either. Uh, but so far, nothing material has come out from them other than saying they are considering it. Um, so I think that's probably a new space in the near future, Uh, that investment managers will start to consider once it's once it's approved and investable assets by the by the regulator,

Speaker 0:
Uh, and how that will work in or come into your portfolio? Um, you know, there's there's lots of arguments to and for it, uh, you know, it doesn't fit into your traditional world of being able to evaluate it, or there's no cash flows and how that's gonna come into modelling and entire portfolio or including this in a portfolio in order to, you know, generate your efficient frontier when there's no historical data.

Speaker 0:
Um, so that's that's probably one of the big the big trends. Um, the other trends that that we are starting to see and we may have slightly touched on it earlier is, uh, around alternatives and and how best to mix alternative investments, uh, in an overall portfolio, construct an overall portfolio with alternatives as satellite investments and your your index tracking be being at your core.

Speaker 0:
I think in South Africa again, we've got a limited space in that, um, antics has done an infrastructure fund, uh, recently that gives some exposure to some sort of, uh, alternative investments.

Speaker 0:
You know, as as the market seems to move on here in s A, we are able to inward list a lot of funds and provide, uh, some exchange control benefits to clients. Uh, which I think is gonna open up the space to bringing in alternatives from other developed markets, you know, such as timber, land, farm land that exists in in the US, for example. Um, and I think that will be a growing space again coming back to this overall portfolio construction view.

Speaker 0:
Uh, those sort of asset classes have uncorrelated returns without traditional asset classes, so they can provide a lot of benefit going forward. So So for me, it's it's those two main themes is alternatives. And putting that into an overall portfolio construction, uh, and and then the the Blockchain a i machine learning technology.

Speaker 0:
So we've touched on the changes. Um, that are that have, um, come in with regulation 28. We've seen an, uh, an increased offshore limit. Um, infrastructure has been brought in as an asset class. Or perhaps I like to think of it as a theme because it may be accessed via alternative investments, listed equity as well as in the fixed income side.

Speaker 0:
So, Elise, what are the considerations that you need to take into account from an indexation perspective when, um, introducing these alternative asset classes as well as infrastructure, say, for example, into an indexation strategy,

Speaker 1:
I think what would be what would be what an investor would need to consider is, um, their skill level because I think in terms of, um, and their understanding of investments as well, um, because if you're going into just a single asset class, you know what you're gonna get in terms of equity, high returns high risk, long term,

Speaker 1:
um, so goes with bonds and cash. But now, when you're going into a specific style such as infrastructure, whether you're going into a tech based fund, a tech based index, what you need to think is, how is this going to fit in my overall portfolio? What role is it going to be bringing? Um, what sort of risk am I in exposing myself to and to what,

Speaker 1:
uh, percentage of allocation am I doing? Um, I think, um, Ryan has spoken about the investments and savings levels are still very low. Um, so a retail investor must consider Am I able to plot a portfolio an efficient frontier model, whereas an asset Allocator, who's got a consultant who who knows what they're doing in terms of constructing a port.

Speaker 1:
Then they will be bringing in this, um, this asset classes into play, and they would really add in value. And they've got the long term horizon in which they would be able to invest and rip up. Um, the benefits. I think some of the considerations that we need to take into account, Um, when you're looking at, uh, international investments. Um,

Speaker 1:
from a local perspective is that if you look at the asset management industry, we've had such a long transformation journey, bringing in skills from the S A market, um, making sure that you are also investing, um, directing your your your trades with the local stock brokers. And I think as we bring in more of a diversification to the global market, we shouldn't move and lose that

Speaker 1:
transformation credentials in which we've been able to, um to gather up as an industry. Uh, we should be able to still say these are the opportunities and there's an investment into the local skills. Uh, this brings in an opportunity for people within the industry to actually grow and and and get that expertise. And that shouldn't be, um, we shouldn't be shying away because of the allocation to offshore.

Speaker 0:
Chloe, if I If you don't mind, if I touch on something that Lisa mentioned, and the importance of understanding just your index and your index exposure, let alone going into the alternative space.

Speaker 0:
A. A year or two ago, when I looked at the one of the CS, a foreign equity general categories,

Speaker 0:
the top five ranked by AM top five funds had various benchmarks there. So there were there was your footie all world, your M AC I world uh, 1000 and I can't recall the the the few others. But when I did the when we did the numbers on that, just those benchmarks over a 10 year period had variability of 30% to 35% returns between them,

Speaker 0:
and you'll generally look at that and think it's just a foreign global equity exposure benchmarks. But those few nuances between each of them from a geo geographical exposure to a sector exposure can actually have very very material. Differences in your portfolio returns similarly in in the the swigs versus all share space. And I know we've moved closer over the years like we touched on.

Speaker 0:
But if you look back even there at at a 10 year period, you've got various different exposures. You've got, you know, resources driving, sitting, sitting as the biggest heavy weight in new one, whereas the other is you got your financial consumer services, and those as well can can perform very differently, as we've seen in various different market cycles. And that's just touching on the the vanilla in the and the importance of understanding what the underlying exposure is that you're getting, which is why,

Speaker 0:
you know, index or passive management is not, as King put it, not passive at all. It's a very active decision that goes behind it

Speaker 0:
and let alone then, if you wanna throw in alternatives to that, so alternatives for the bulk of it is not. They're not valued in an open market, like like what we have on your list of equity. They very much appraisal based evaluation based Someone comes out there with a notebook and starts to jot down what your your your appraisal value should be,

Speaker 0:
and that can create a very smooth profile of returns. And then you throw that into your traditional way of optimising your portfolio on a normal distribution. Those those investments will shoot the lights up. They'll say, Allocate everything to that. So you got to find methods again to counter this into your portfolio that you just end up having consultation with this.

Speaker 0:
So So it's a vast spectrum of understanding your underlying exposure from from very passive indices all the way up until to the alternatives. So I think one of the points that we mentioned about what makes a good benchmark is that transparency, right? And I think the challenge when it comes to alternative investments, that lack of transparency, perhaps because of irregular, um, pricing

Speaker 0:
Kingsley any comments with regards to alternative investments and then also the the increased, um, allocation to global global assets. Yeah, I don't think I've got too much more to add on alternative investments. I mean, you know, for most investors in our local market, they are going to be restricted or constrained by something being publicly traded. Um, it's only when you start investing, say, through your pension fund or through a life policy,

Speaker 0:
uh, for retirement that you may have some exposure to unlisted alternative investments. Uh, but certainly the points made earlier about, you know, evaluating those in the context of the risk return trade off. And, uh, you know how those asset classes interact with each other. Those are timeless truths and certainly need to be, uh, considered. Um, just in terms of,

Speaker 0:
you know, the increased offshore allocations that R 28 has brought about. It does necessitate there being

Speaker 0:
more focus given to what you allocate to offshore. Um, there's a lot more opportunity set outside of South Africa. Uh, in terms of the types of strategies the types of asset classes, um, that that you can now put into that 45% or up to 45% allocation. And so

Speaker 0:
there will be a need for investors to be a lot more, uh, selective and and for as a managers to be a lot more, uh, you know, think a lot more deeply around what goes into that allocation to give you the best,

Speaker 0:
uh, risk return profile that you can get, as you know, as a South African investor and continuing your point there. Kingsley, Um, a lot of these grandfather companies that Annalisa mentioned earlier they these large multinationals. So how did the locally listed multinationals then affect the movements of some of our local industries?

Speaker 0:
Yeah, so that I mean, Annalisa gave a great summary earlier. Um, But what you'll find with those grandfather companies is that a lot. Most of them have a significant portion of their revenue that's generated offshore. And so it's actually quite interesting when you sort of scratch beneath the surface and look under the hood. So to speak of our local market is that a significant portion of where earnings are generated from in our on on the J. S C comes from offshore sources,

Speaker 0:
and certainly in the construct of the all share index and the caped all share index. In years past, that number was even higher than say, you would get from the switch. But given that these changes are now happening with more recently B B, H P Billiton, B, H P group, and, uh and and now Richmont in June,

Speaker 0:
we are seeing that down waiting, happening uh, to those foreign revenue sources. And so what you're seeing with our local indices is perhaps more of an expression or more of a. It's capturing more of what's happening locally, more of an S A Inc flavour, and that will then also provide an opportunity for investors and portfolio managers,

Speaker 0:
uh, and and and and clients and D f MS to to now say, OK, what do I want this overall balanced portfolio to look like? How much s a Inc exposure do I want in the portfolio? Uh, particularly given that the S A indices are now more locally focused or becoming more locally focused. So you might have to think a little bit differently

Speaker 0:
to say, Well, I used to get high offshore revenue sources with a local index, but I don't get that anymore. So what can I do to pick up that offshore exposure which I used to have in the past?

Speaker 0:
So, Annalisa, Now, to wrap off a very interesting discussion that we've been having,

Speaker 0:
what is your outlook then, with regards to indexation strategies, particularly in the constrained local market that we that we find ourselves in?

Speaker 1:
Um, I think, uh, the interesting. Uh, point that we're probably going to be seeing is, um, how things play out in the local market in terms of the local indices. Um uh, Ryan had started off in terms of where we started off with the evolution of of of the indices and how we've come about and where we are right now. I think it what's going to be interested, what plays out in the next few months in terms of the distinction between

Speaker 1:
the O and the six and how investors are taking that, Um, I think Kingsley has just mentioned something now and saying, um, you used to have a higher allocation to the S A, um you are listed and how investors are actually going to be finding ways to supplementing that. And, um, uh, thirdly is probably in terms of with this regulation change. Regulation 28

Speaker 1:
um, the conversations that we're going to be having from a global indexation, uh, perspective. Um, and I think what's very important and it is coming out is that, um in the investors have got a choice in terms of what they're investing in, and indexation is an opportunity to explore those choices whether it's e s g integration, whether it's investing into a factor or a theme, uh, whether it's bringing in a different asset class, that you wouldn't have, um,

Speaker 1:
got an exposure. So there's going to be more conversations as to How can you customise or how can you, um, tailor something to my needs but still focus and bring in, um, do it in a rules based manner, Do it in, um, in, uh, bring in the governance of, of, of, of implementing, um, that.

Speaker 1:
And I think, um, as there is, um, the opportunity to invest in active managers. Um, but the bringing in the assets into in into indexation,

Speaker 1:
um, and then gives the opportunity to, um investors to to find which were the active managers that are performing well consistently over time. So I think those are the things that we are looking forward to over the next few months and over the next, um, 12 months to a year in terms of, um in indexation space.

Speaker 0:
Annalisa. Thank you very much. Ryan Kingsley, Thank you for imparting your wisdom on, uh, indexation strategies.

Speaker 0:
Thanks for having us, Chloe.