Global investment manager PortfolioMetrix listed its first actively managed exchange-traded product, the PortfolioMetrix Active Income Prescient AMETF, on the JSE at the end of January.
The ETF is essentially a listed version of the PortfolioMetrix BCI Dynamic Income Fund, which returned 9.1% a year over three years to the end of December 2023. The ASISA multi-asset income sub-category had an average return of 7.4% over the same period – in line with the All Bond Index. The SteFI returned 5.7%.
Philip Bradford (pictured), PortfolioMetrix’ head of investments for South Africa, said bonds are a misunderstood and underappreciated asset class, yet South African bonds are offering some of the highest yields in the world.
“Current bond yields of over inflation +6% create the potential for equity-like returns going forward, but with much lower risk.”
The ETF is Regulation 28-compliant, so it is also suitable for compulsory investments, such as pension and provident funds, and retirement annuities.
The fund’s benchmark is the SteFI Composite Index.
The management fee is 0.58% (excluding VAT).
Bradford said the decision to offer the portfolio in a listed version was made against the backdrop of huge investor demand for high-income paying investments, as well as South Africa’s shrinking equity market but flourishing bond market.
“Professional JSE investors requested that we list the fund because historically they have struggled to access the attractive fixed-income investment opportunities for their clients. The PortfolioMetrix Active Income Prescient AMETF makes available a tried-and-tested fixed-income strategy to both portfolio managers and retail investors.
“Actively managed ETFs are set to revolutionise how investors build portfolios, offering flexibility, transparency, and value for money. Professional investors constructing portfolios have open access to an ETF listed on the JSE,” he said.
Value proposition
Considering that bond ETFs have been available for many years in South Africa, Moonstone asked PortfolioMetrix what the AMETF will “bring to the table” for investors.
“The FTSE/JSE All Bond index is a very narrow index containing only 20 bonds, which are almost entirely issued by the government. These government bonds are also mostly fixed-rated and typically very long-dated, which can result in significant capital volatility. This means index fund investors aren’t able to access to the 2 200 bonds instruments listed on the JSE, many of which offer great yield opportunities and risk diversification benefits. However, this corporate bond market is a highly specialised area of fixed income, traditionally reserved for institutional investors.
“Accessing credit and constructing a prudent income portfolio is difficult to replicate as a retail investor. The Active Income ETF allows investors to access the best South African fixed-income ideas in one portfolio, but with the additional benefit of liquidity,” Bradford said.
The fund will predominantly invest in interest-bearing securities and aim to achieve a high level of sustainable income while also prioritising capital preservation.
“With a current gross yield of 11.8%, we are positioned to do well in a falling interest rate environment, which we expect to be the case over the next few years,” he said.
“We’ve positioned the portfolio to lock in interest rates at current high levels by investing in selected long duration fixed-rate bonds. This longer-duration positioning means that the fund will be able to largely maintain its high yield and potentially receive capital gains if interest rates fall materially more than the market expects. However, we still maintain a strong exposure to high-yielding shorter-duration bonds, like those issued by the major South African banks, which will provide capital stability during periods of market uncertainty.”
The AMETF is managed by the same award-winning team, led by Bradford, that has been managing income funds with the same mandate for almost a decade.
