Personality of the Year: Nerina Visser - using ETFs as building blocks for investment solutions

Nerina Visser is an applied mathematician by training with a specialist academic background in mathematics and statistics. She has been involved in the South African financial markets for more than 20 years after starting at Old Mutual Asset Managers in 1996 and later joining Nedbank Capital in 1999 as a quantitative strategist.

“Before I joined the financial industry, I worked in the defence industry as a rocket scientist,” says Visser. As such, when she talks to people about exchange-traded products (ETPs) and structured products, she quips “I can honestly say that this is not rocket science as I know what I’m talking about”.

“I was doing consultancy work as I raised a family but one day my husband came home with a newspaper ad about a vacancy for a quantitative analyst for one of the large asset managers in South Africa,” she adds.

Although she had little to no idea what an asset manager or asset allocation were, the company was looking for someone analytical and with attention to detail that loved numbers - this really fitted in her background. 

“They gave me the job and I absolutely loved it from day one. One of the areas I focused on during my time at Nedbank Capital was index methodology and the GICS classification,” she says. “This was a time of significant change for South African benchmark indices, and quantitative analysts had the proverbial rug pulled out from underneath them, as historical index data was no longer relevant. I did significant research around indices, inclusion criteria, rules and calculation methodologies, and what drives index performance in a lot more detail.”

Onwards and upwards

This role gave Visser a comprehensive understanding of indices so the shift towards ETFs was a natural move.

“ETFs provide a very transparent, efficient and cost-effective way to get exposure to indices,” she says, noting that structured products and ETFs occupy different spaces and have different risk-return characteristics, but still rely on the same underlying indices.

“We see structured products and ETFs as complementary as long as the end investor is aware of the risks and payoff profile,” she adds. “We have seen instances were institutional investors have invested in these products without really understanding them, basing their decision on considerations around capital guarantees or leveraged exposure without really understanding the unseen risks: counterparty credit, complex underlying indices etc.”

Visser is currently director and part-owner of etfSA – a specialist discretionary fund manager exclusively using exchange traded products in its clients’ portfolios.

“We cover a wide range of product wrappers such as discretionary investments, retirement savings, post-retirement investments and tax-free investment accounts,” she says. “We also use exchange-traded notes [ETNs] in our clients’ portfolios.

“What differentiates us from other discretionary managers is that we only use exchange-traded products as the building blocks for our investment solutions.”

As an ETF strategist and advisor, most of her work relates to fund management but also to advisory services to the industry.

“We offer advice to product providers and distributors including ETF issuers on index and wrapper design, but also stock exchanges and regulatory bodies around the regulation relating to indices and ETFs,” says Visser.

The problem with ETNs

Although etfSA does not use synthetic or leverage/inverse ETFs (current regulation in the country only allows delta one structures and prevents the offering of any geared exposure on ETFs), Visser has seen increasing demand for actively managed ETNs.

“We have concerns about those products and remain focused on trackers of rules-based indices,” says Visser. “The problem we see with actively managed ETNs is that for those you need a market maker or liquidity provider, and we liaise directly with market makers in executing the trades on behalf of our clients. We prefer the transparency and predictability of the underlying holdings of the passively managed index tracking structures. 

Other area of concern, however, is the significant increase in new indexing strategies including smart beta, and proprietary indices.

“This can create a problem if the drivers of performance on these strategies cannot be explained,” she says, pointing out that there is an overreliance on past performance. “That is a dangerous trend as there is not enough attribution analysis, and you may end up making decisions about the future completely in a vacuum.”

She believes that the industry has to be more thorough and transparent about past performance and enable investors to make more appropriate decisions about underlying exposure.

“I don’t think historic performance metrics – specifically from a return perspective – is a good way to explain the drivers of performance,” she says. “This approach can work to explain the volatility of an index, the standard deviation or correlation to other factor drivers but not to explain returns.”

Visser also believes the industry has to be more precise with our language.

“I’m a firm believer that there is no such thing as passive investing because all investment have a component of active decision making and it really comes down to what you select actively across wrappers, individual securities, sectors, asset classes etc,” says Visser. 

The South African market is going through a regulatory overhaul whether it is from an advice or a product design perspective and it is a critical time to grow the industry.

“Regulators are looking at a number of grey areas such as active indices or tax treatment within different product wrappers, and coming up with new guidelines,” says Visser. “The concern is that investors are overloaded with information that is inappropriate or irrelevant to make informed decisions.”