Initially off to a slow start, South Africa is beginning to see momentum in the demand for actively managed Exchange Traded Funds (AMETFs). The South African market, though relatively young with nine AMETFs, is expected to expand rapidly, with ten more AMETFs planned for 2024, potentially doubling the market size. ETFs, both active and passive, saw new capital raised of R8.3bn in the first half of 2024.
Pictured : Kim Gibb - Chief Executive Officer at Prescient Management Company
As early entrants in the AMETF space, we anticipate this growth to continue, spurred by increasing interest from larger South African asset managers. This expansion will provide local investors with a broader selection of ETFs.
Unlike the US, the growth in the South African ETF market looks set to lean towards actively managed ETFs. This is largely because investors have the passive options covered via offshore funds and large established South African passive ETFs. Active managers have opportunities to explore new distribution channels through the ETF wrapper, and we’re seeing them starting to take advantage of this.
Drivers of Growth
The growth of the South African ETF market is fuelled by new asset flows, more launches, and positive performance of global and local stock indices. ETFs offer fund managers a new distribution channel, with regulatory changes allowing active ETFs that appeal to segments of the fund management market that did not have a passive, low-fee option.
From a practical standpoint, South African ETFs operate similarly to their European cousins. Service providers like Prescient can offer an end-to-end platform solution, from listing the Johannesburg Stock Exchange to trading support. They can also serve as authorised representative in Europe as well as listing agent and fund administrator. Launching new ETFs in South Africa currently takes around six months, and the listing costs are in the region of ZAR 150,000. The market, though small, offers ample scope for new entrants to make a name for themselves, especially active managers.
Changing Investor Sentiment
As more large fund managers enter the market, we expect shifts in investor and fund manager sentiment, leading to further ETF sector expansion. Increased interest from foreign fund managers in the South African market is another trend to watch. A quicker route to market for these participants may be the launch of a local feeder fund into a Financial Sector Conduct Authority (FSCA) approved offshore fund.
Like other markets, traditionally South African investment managers have favoured unit trusts due to their higher fee margins, but this is expected to change with the growing adoption of ETFs. Retail sector participation is anticipated to increase as ETFs trade like any other security on the JSE, accessible through share trading accounts.
Retail Participation to Drive Growth
Retail participation will be a significant growth driver. We expect interest in AMETFs offering ‘cash alternative’ dynamics, especially those with a fixed income or money market offering. South Africa is experiencing a surge in stock market investing, fuelled by successful retail investment platforms. If growth patterns follow those from other markets like the US, we anticipate this will drive more inflows to ETFs due to their liquidity and ease of access compared to more traditional options.
Retail interest in stocks generally in South Africa was minimal prior to the pandemic, when, according to the JSE, private investors represented only 3% of volumes. This has jumped significantly since 2021 with retail investors playing a bigger role in daily deal flow. As cash rates drop, we also expect to see more appetite for higher yielding investment strategies in AMETFs.
This retail adoption will take time but could lead to a snowball effect, especially as the variety of AMETFs grows and well-known brands enter the market. While the number of AMETFs currently trading in South Africa is still small, all the indicators are there for a significant sea change in the market over the next 12 months.
About Prescient Management Company
Prescient Management Company (RF) (Pty) Ltd (Prescient Manco) is an independent provider of globally competitive outsourced management company services to traditional and alternative collective investment funds.
Approved under S42 of the Collective Investment Schemes Act (“CISCA”) as a Financial Sector Conduct Authority (“FSCA”) licensed management company, Prescient Manco provides support to discretionary financial service providers who are looking to grow their business by setting up co-named funds on one of our platforms. Our platform solution includes the Prescient ETF Scheme.
Disclaimer:
Prescient Management Company (RF) Pty Ltd is registered and approved under the Collective Investment Schemes Control Act (No. 45 of 2002) Registration number 2002/022560/07 and acts as a representative office.
