Bruce Whitfield:
We looked at the unit trusts last week. And it was interesting to see how well many of them did, and in a bull market you would expect unit trusts to do nicely. But few actually managed to beat the all share index. I started wondering about Satrix, as an investment vehicle.

The MD of Satrix, Mike Brown, is with us in the World at Six studio this evening. Mike, if you have a look at Satrix, and if you do just baby steps. I know you do this every time you come onto the station, but just a quick summary of what Satrix is.

Mike Brown:
Hello, Bruce. Yes, Satrix is an index tracker. It tracks the top forty index and also the financial and the industrial index on the JSE.

We own the portfolio that makes up that index. We then list a share on the JSE. You buy a single stock, Satrix 40, and that gives you the performance of the top forty index. In essence we’re a unit trust, but we’re listed. You buy and sell it through the market. We don’t try and outperform the market. We just perform at exactly the level the market’s at.

Bruce Whitfield:
Well, you can’t outperform, because you are the market.

Mike Brown:
So we duplicate the market exactly, so you get the index. Now there are periods when the index is a good investment, and obviously last year was one of them, because Satrix 40 outperformed all except 14 of the 650 unit trusts which are out there.

So now you’re saying what happened to the other 635? Why didn’t they outperform the index? They’re all trying to outperform the index. Now some have got different mandates. They don’t want to outperform the index; they just want to reduce risk and things like that.

But what’s happening is that the market at the moment is really a growth market. The economy is growing quite strongly, and company growth is quite strong. And most of the shares have got this priced in, so it’s very difficult to find value. It’s not a value market. A value market is where you look for undervalued companies and you look for opportunities, which was around in 2002/2003.

We’re now in a growth market, but we’re also in a market of massive volumes. When the market is only trading R1- or R2-billion a day, you can find some opportunities. But when the market trades at R4-, R5-, R7-, R8-billion a day, nearly all that trade happens in the big companies, which means all the trades happening in the top forty.

All the activity is in the top forty. So if you buy the top forty index, you are getting the performance of that market. It’s also becoming a more efficient market. Companies now, if the results are going to change, they report it immediately. The old days, you’d have to wait, till the end of the year. And they’d wait three months if it was bad news. So it would take fifteen months to find out if something is bad. Now you have got to report. If your results are going to be 20 percent up or down, you’ve got to let the market know immediately. So it’s a very efficient market, and in efficient markets, worldwide, tracker funds are very hard to outperform.

Bruce Whitfield:
But that is the big issue here. I suppose one of the downsides of something like a Satrix 40, is I can’t come to you and say, Mike, I’d like the Satrix 40, but can you just take out the gold shares, because they frighten me a bit.

Mike Brown:
Well, if you buy the Satrix 40, you obviously get whatever is in that index, and 40 percent of the top forty index is resources, 20 percent is financial shares, the rest is industrial, and retail. So it’s a nicely blended index, but its somewhat weighted toward resources.

Now resources are the place to be at the moment. Will that continue to be the case? Well, if China and India grow and all the rest, then obviously you may still want to be there. So it’s a nicely weighted index, but yes, you do have that run on resources.

I think over time, what we’ll find is the exchange traded funds, which Satrix is, it’s funds traded on the exchange, will provide opportunities to invest in other sectors of the market. If you don’t want to be in Satrix resources, then maybe you can go short on a resource ETF, or something like that. Or just buy the resources part of the index. That will happen in time.

At the moment, yes, you’re getting the benefits, and the very nice benefits of the resources run. Most active managers have missed that. Satrix has given you that, so it’s given you a very good performance over the last year to 18 months. In fact most active managers haven’t managed to outperform Satrix. The cost structure of Satrix is very low.

Bruce Whitfield:
That’s an important issue as well. Why is the cost structure for Satrix lower than, for example, a unit trust? Is it because you don’t have to actually manage the portfolio?

Mike Brown:
The portfolio is easy to manage. We just duplicate the portfolio. So we just adjust the index if it changes for any reason, and it only changes periodically. And then maybe one or two shares fall out the index, and maybe one or two come in. So we don’t do a lot of trading on the portfolio.

It’s very expensive to trade in and out the portfolio, and of course to adjust the portfolio, because you have got to have active managers, and committee meetings and risk management as so on. We don’t have any of that.

The other thing is we trade through the stock market, so the unit trust manager has to make a price every day and buy and sell units and run a massive back office running registers. That all happens through the market. You register [on the straight]. You’re just buying a normal share when you buy Satrix –

Bruce Whitfield:
Do I have to go through a broker to get onto Satrix? Or can I go directly to Satrix?

Mike Brown:
There are two ways — you can either go through a broker. So if you’re not a stock broker, you can’t buy it like a normal share, and the stockbroking industry is bringing its cost down quite a bit, because of the demands from the private clients. Broking rates, particularly online brokers, are now about a third of what they used to be. It's not as expensive to go to a broker as it used to be.

But we find in Satrix, what’s very interesting is how many people actually buy it through the Satrix investment plan. That’s where we have a manager who buys securities on behalf of the investors, invests on their behalf, re-invests the dividends, sends them statements and all the rest. Then you invest as little as R300 a month in a debit order, or R1000 lump sum. So that’s there for the small investor.

Now we’ve got nearly 30 000 small investors in that investment plan, most of them on debit orders. And that’s really become a very good way of aggregating savings, because you have the discipline of putting a little money away every month. And the costs aren’t eroding it, because you’ve got a low cost structure. You’d be surprised how the performance picks up over time.

Bruce Whitfield:
It’s all good, retrospectively. I can’t fault Satrix 40 retrospectively. The trick comes now, when you’ve got a JSE above 19 000. It is severely, quite considerably weighted, 40 percent of the index is weighted towards the resources sector. It is quite a big bet, in a very strong bull market, to start putting money into that index right now. What’s your view on that?

Mike Brown:
Yes, I think that’s true, but what’s interesting is how the volumes have been picking up recently in Satrix. We’ve been trading record volumes in the last few months. Now some of that’s in and out. Some are selling, but some are buying.

But a lot of people, particularly foreign investors and hedge funds are now buying our market. Of course they tend to buy a fund, rather than buy one or two shares, they just buy a fund like Satrix. So there is some demand, and it seems to be indicating people think there’s something left in the market. So that’s one thing you can do.

The second thing you do, as you well said, if you’d held Satrix now over the last 18 months or so, you’d have made a lot of money.

Bruce Whitfield:
Yes, that’s what you did. Looking forward as somebody who got nervous at 16 000, more nervous at 17, terrified at 18, and petrified at 19. It’s just…

Mike Brown:
There’s two things you can do, one is you can sell some of your Satrix, in other words, look on the profit. And it’s also securities, so if you are a sophisticated investor, you can hedge it, you can short it.

Bruce Whitfield:
Can you short Satrix?

Mike Brown:
You can short it. It’s a normal security, you just short it, go to your broker and say I want to sell short, which means you sell now for delivery later, and if the price falls, then you benefit from that, because you got today’s price and not the price from which it has fallen.

Or you can go into a single stock future on Satrix, or you can just hedge it to the futures market. Because it exactly duplicates the top forty index on the future. So it’s very easy to hedge Satrix.

The other thing you can do, and that’s where the small investor is smart, is you just put some money away every month. So every month you are buying Satrix at whatever price it trades at the end of the month. So if the price falls a bit, you just buy more securities. Averaging out over time, you actually do better than just putting a lump sum in — unless of course, you bought right at the bottom of the market.

So for the investors who are a bit wary, just average out, put a bit in every month, and over time, provided you’re in for a few years, you’ll find that even if the market dips, that’s fine. You’ll ride those dips if you buy more securities over that period when the market’s dipping.

Bruce Whitfield:
100 percent. That’s the point about investing. The basic rule is — you’re buying it for the long-term. You’re not in it to watch it every day, and every time it goes down five percent, have a small heart attack.

Mike Brown:
Yes, in terms of an index investment, you should really be looking longer term. If you take a three to five year view, the market does have down phases, but most of the time it goes up. The five year, ten year, twenty year performance of the JSE. Because that’s all you’re buying. The stock exchange has been very good.

Bruce Whitfield:
It’s not necessarily the sort of thing that if you were planning to retire in five years time now, that you would take all your retirement funds and put them into Satrix. It’s a nicely diversified portfolio of shares. It’s slightly higher, the potential risk there.

Mike Brown:
There is a bit of a risk, but I think what a lot of people do when they’re at — well, I don’t want to slag off the financial industry, is they put their money into cash, which means they have no more capital gain.

If you have some of your money in Satrix, you’re going to get some capital gain. So you need to mix it. You would have some money in cash or in bonds, and some in Satrix. But if you want to be exposed to the equity market, in a product that you can get in and out of immediately, you just phone your broker, and you sell it while you’re talking on the phone to him. It’s not a case of having to take months to get out of a product.

Bruce Whitfield:
The advantage is liquidity.

Mike Brown:
It’s highly liquid, and you are exposed to the equity market. You’re going to get some capital gain, or loss — but hopefully capital gain over that period.

Bruce Whitfield:
Mike Brown, the MD of Satrix, thank you very much for coming into the World at Six studio this evening.

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