Geographical earnings is an important consideration when putting together an ETF portfolio. Avoiding over-exposure to a particular region protects your portfolio from geopolitical instability. Local pension and retirement annuities (RAs) have to be Regulation 28 compliant. Until a week ago, 75% of these funds had to be invested locally. Add an ordinary Top 40 ETF on top of that and the fear was that an investor would be too exposed to the South African economy.
Many ETF investors have attempted to mitigate this risk factor by investing in a growing number of offshore ETFs. The hope is to find the ideal blend of local exposure for growth and developed market exposure for stability and currency movement. However, Sharenet poked a hole in this theory.
Currently 56.81% of Top 40 earnings are earned outside of South Africa. An investor holding nothing but a vanilla Top 40 ETF like the Satrix 40 has less than 50% exposure to the South African economy.
Where do the earnings come from?
The Sharenet report doesn’t include an analysis of where the offshore earnings actually come from. For example, BHP Billiton earns 100% of its earnings outside of South Africa. However, some of its operations are in developed North American economies while others are in the emerging economies of South America. For an investor trying to manage geo-political risk, this isn’t insignificant. BHP Billiton makes up a sizeable 8.7% of the Top 40 index.
Other companies might have a lot of foreign income, but because they make up such a small part of the Top 40, it has little potential impact on your investment. For example, NEPI Rockcastle earns 100% of its earnings offshore, but the company only represents 0.61% of the Top 40 Index. Even if the whole company burns to the ground, the impact on your investment will be fairly small.
The report is a great springboard. For one, it tells you that you have about half as much South African exposure as you probably assumed holding a Top 40 ETF. If you’re feeling optimistic about the South African market, you could start looking at the Ashburton Midcap ETF to bolster your local exposure. If you’ve been considering adding an offshore ETF to your current Top 40 ETF, this might change your mind about how much offshore exposure you need – if any.
Lastly, it might give you a better sense of the exposure of your overall portfolio, including your retirement annuity. Many new-age RAs invest in index-tracking products. Even if 75% of your RA is invested in a Top 40 tracker, you don’t have 75% exposure to the South African market. If your retirement product invests into another fund, you could compare the holdings of that fund to the Top 40 exposure to see how much local market exposure you actually have.
The table below contains the Sharenet findings. To play around with the interactive table, visit the Sharenet website.
|
Name
|
4 Month Return as at 16 Feb ’18
|
Top40 Weight
|
Prop Local
|
Prop Offs
|
Weighted Offshore
|
|---|---|---|---|---|---|
| Naspers Ltd Class N* | -2.44% | 23.29% | 47.45% | 52.55% | 12.24% |
| BHP Billiton PLC* | -2.07% | 8.70% | 0.00% | 100.00% | 8.70% |
| Cie Financiere Richemont SA DR | -18.60% | 8.79% | 8.30% | 91.70% | 8.06% |
| Anglo American PLC | 3.52% | 4.52% | 6.90% | 93.10% | 4.21% |
| MTN Group Ltd | 1.24% | 3.68% | 31.30% | 68.70% | 2.53% |
| British American Tobacco PLC* | -20.96% | 2.81% | 12.65% | 87.35% | 2.45% |
| Sasol Ltd* | -5.45% | 3.58% | 47.60% | 52.40% | 1.88% |
| Mondi PLC | -11.47% | 1.80% | 6.10% | 93.90% | 1.69% |
| Old Mutual PLC | 10.84% | 3.12% | 50.20% | 49.80% | 1.55% |
| Bid Corp Ltd* | -16.06% | 1.39% | 0.00% | 100.00% | 1.39% |
| Standard Bank Group Ltd* | 32.81% | 4.44% | 69.70% | 30.30% | 1.35% |
| Aspen Pharmacare Holdings Ltd* | -11.99% | 1.53% | 15.60% | 84.40% | 1.29% |
| Anglogold Ashanti Ltd | -3.60% | 0.81% | 23.40% | 76.60% | 0.62% |
| NEPI Rockcastle PLC | -43.92% | 0.61% | 0.00% | 100.00% | 0.61% |
| Investec PLC* | 5.80% | 1.04% | 42.80% | 57.20% | 0.60% |
| Gold Fields Ltd | -12.33% | 0.64% | 11.10% | 88.90% | 0.56% |
| Gold Fields Ltd | -12.33% | 0.64% | 11.10% | 88.90% | 0.56% |
| Reinet Investments SCA | -21.20% | 0.56% | 2.98% | 97.02% | 0.54% |
| Mondi Ltd | -11.05% | 0.58% | 6.10% | 93.90% | 0.54% |
| Sappi Ltd* | -13.68% | 0.72% | 25.90% | 74.10% | 0.53% |
| Sanlam Ltd | 34.94% | 2.60% | 80.10% | 19.90% | 0.52% |
| Barclays Africa Group Ltd | 44.62% | 2.15% | 76.10% | 23.90% | 0.51% |
| Intu Properties PLC* | -16.45% | 0.49% | 0.00% | 100.00% | 0.49% |
| Woolworths Holdings Ltd | 18.58% | 1.03% | 60.50% | 39.50% | 0.41% |
| Remgro Ltd* | 8.86% | 1.89% | 78.53% | 21.47% | 0.41% |
| Mediclinic International PLC | -13.98% | 0.57% | 28.40% | 71.60% | 0.41% |
| Discovery Ltd | 18.60% | 0.97% | 64.20% | 35.80% | 0.35% |
| Vodacom Group Ltd | 10.70% | 1.60% | 79.30% | 20.70% | 0.33% |
| Growthpoint Properties Ltd* | 17.98% | 1.32% | 77.00% | 23.00% | 0.30% |
| Investec Ltd | 6.62% | 0.46% | 42.80% | 57.20% | 0.26% |
| Fortress REIT Ltd Class A | -6.14% | 0.30% | 15.40% | 84.60% | 0.25% |
| Fortress REIT Ltd Class B | -55.87% | 0.22% | 15.40% | 84.60% | 0.19% |
| Tiger Brands Ltd | 18.78% | 1.19% | 86.60% | 13.40% | 0.16% |
| Life Healthcare Group Holdings Ltd | 10.97% | 0.63% | 76.40% | 23.60% | 0.15% |
| Redefine Properties Ltd | 9.34% | 0.94% | 86.80% | 13.20% | 0.12% |
| Nedbank Group Ltd* | 39.03% | 1.00% | 90.60% | 9.40% | 0.09% |
| Mr Price Group Ltd* | 61.63% | 1.11% | 93.40% | 6.60% | 0.07% |
| Firstrand Ltd | 40.64% | 3.80% | 99.00% | 1.00% | 0.04% |
| Bidvest Group Ltd | 44.81% | 1.33% | 98.14% | 1.86% | 0.02% |
| Resilient REIT Ltd* | -46.97% | 0.40% | 97.00% | 3.00% | 0.01% |
| Capitec Bank Holdings Ltd* | -12.94% | 0.70% | 100.00% | 0.00% | 0.00% |
| Rmb Holdings Ltd* | 31.33% | 0.89% | 100.00% | 0.00% | 0.00% |
| Top40 Index | -2.05% | 56.81% |
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