An index fund has one job, which is to hold what its benchmark holds. That gets awkward when the benchmark stops existing. The JSE's licensing arrangement with Research Affiliates ended at the end of August, taking the FTSE/JSE Rafi 40 with it, and the two South African funds built on that index have had to find something else to measure themselves against.
The Rafi family exists because of an argument about weighting. The JSE launched these indices with Research Affiliates so that both the companies in them and the size of each holding would come from company fundamentals rather than from the share price: sales, cash flow, book value and dividends. A company's place in the index is meant to reflect the business, not what the market currently thinks of it.
What Satrix had to do to move
Changing a unit trust's investment policy is not the manager's decision alone. Under section 98 of the Collective Investment Schemes Control Act, Satrix had to put it to a ballot of unitholders: at least a quarter of investors by value had to respond in writing, and a majority of those had to agree. The vote passed and the exchange-traded fund switched on 20 July, keeping its JSE code, its name, its performance history and its 0.50% annual fee.
The replacement uses the same fundamental factors with two adjustments. It marks companies down for carrying too much debt and rewards them for spending on research and development, which Satrix says lifts the scores of firms with real fundamental strength and penalises the over-leveraged. It also rebalances in four quarterly tranches rather than all at once, so the fund is not repositioned on a single day of the year.
The top of the index looks different
The change shows up most clearly in what the fund now holds most of. On the top-ten comparison Satrix put in front of investors, the old index was led by Sibanye Stillwater at 10.23%, with Gold Fields and Anglo American behind it and Naspers fourth. The replacement is led by BHP and Glencore at 10% each, with Anglo American and British American Tobacco close behind. A gold-weighted top ten becomes a diversified-mining one, on the same four measures.
Old Mutual went its own way with its Rafi 40 unit trust, reviewing the full universe of fundamentally weighted alternatives before settling on a refined index built directly by Research Affiliates. On the July fact sheets that fund had beaten Old Mutual's own Top 40 index fund over one, three, five and ten years, and recovered from its deepest drawdown in eleven months against twenty-three for the Top 40 fund.
Satrix warned that realigning a portfolio to a new methodology can bring extra trading costs with it. Investors who did nothing keep the fund they bought and a benchmark they did not choose.
