After South Africa, Nigeria is one of the most prolific exchange-traded funds (ETFs) markets in the region, according Nerina Visser, ETF strategist & advisor at etfSA, and moderator of the Exchange traded funds - building blocks, stumbling blocks and opportunities in Africa panel at the SRP conference in The Maslow in Johannesburg on November 2. "Moreover, this is the market with the biggest number of listed ETFs and I am happy to say the majority of them are home grown," said Visser.
Maurice Madiba (pictured), chief executive officer at Cloud Atlas, pointed at the lack of African underlyings to build a comprehensive ETF offering. "There are just a few index providers who carry some African indices," said Madiba, adding that the biggest challenge is to access assets with liquidity. "Another difficulty is the lack of data in the African market. We spent more than a year just investigating the companies that are listed on the exchanges in the region and the pricing that they have."
According to Madiba there are about 54 different states including South Africa but there are only 21 exchanges. "At first, we [Cloud Atlas] released the pan-Africa EXSA index and then we asked ourselves whether we wanted to go into the ETF space," he said. "The creation of our first ETF was a long process as we needed to scale it back and have something that was tradable. Therefore, we cut it down to 50 stocks which we call now the big 50. This forced diversification across 13 different African markets."
Madiba also said that in order to get this segment in motion in Africa there is a need for a centralized service providers. "If you are setting up an international ETF or a single market ETF, your service provider is probably a country, and here comes the need to find centralized service providers to make this process a little bit easier," said Madiba. "Probably, the next twelve months, will be devoted on building that service provider base."
Len Jordaan, head of ETF distribution, structured & risk solutions at Absa/Newfunds, also highlighted a number of challenges Absa had to face before releasing its ETF offering. "After contacting different exchanges around Africa, the overwhelming story that we got was that Africa lacks the indexation story that allows the listing of ETFs on the exchange to stimulate liquidity, for instance," he said. "Furthermore, from a market efficiency perspective, most of the exchanges in the region don't allow for short trade, for short sales and they aren't developed derivative markers. So, there were definitely some of the technical issues that we have successfully overcome from a market making perspective."
According to Jason Swartz, head of portfolio solutions at Satrix, the market has done a good job of broadening the base of variability of those indices and products. "This industry is appealing to investors and they are working on understanding the well-defined set of rules in terms of portfolio construction," he said. "Other advantages include the predictability of the market's performance and its diversification."
However, Madiba noted that a major drawback of the ETFs segment is related to the cost of trading. "Cost of trading in Africa is exceptionally high and that is one of the issues we are facing," he said. "But looking at ETFs in general, institutional mandates is something that we as an industry are trying to bring on board."
According to Visser, African funds and fund managers are actually exporting that investment opportunity to offshore managers. "If you can actually bring that fairly well-known investment opportunity to the African market, it means you are necessarily creating that follow through into the local market," said Visser. "Therefore, you bring, for example, the S&P 500 directly to the African stock exchange but at the same time you bring a product that is very familiar in terms of its underlying investment and you are using that to familiarize the market participants with what is an ETF and how it is traded."
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