ETFs emerge as a crucial investment option
Bolokwe Encourages Investors to Explore Diverse ETF Opportunities
Kopano Bolokwe, the Head of Product Development at the Botswana Stock Exchange (BSE), expressed the exchange’s interest in lobbying for an explicit allocation for Exchange Traded Funds (ETFs) within pension fund regulation. This move aims to actively encourage the issuance and adoption of these products.
Bolokwe mentioned that this is a focal point of their current efforts, although he did not provide extensive details. He noted this absence of designated investment allocations for ETFs during the exchange’s Educational Webinar on exchange-traded products.
ETFs are listed investment products designed to mirror the performance of an index, whether it comprises a basket of shares, bonds, or individual commodities. Regulator Non-Bank Financial Institutions Regulatory Authority (NBFIRA) grants them Local Asset Status (LAS), and they are listed on the BSE as a local asset, despite their primary revenue stream being offshore. The LAS designation enables them to tap into pension funds’ local investment allocation.
Despite the absence of an explicit allocation, fund managers have the flexibility to include ETFs within alternative investment allocations, contingent upon their investment mandates. The BSE has been actively promoting awareness of ETFs as a viable alternative investment option, particularly in light of the limited availability of investible assets locally.
P8 billion repatriated
Bolokwe emphasised his point in light of the recent changes in pension fund regulations, which now require asset managers to allocate 50% of funds onshore. Minister of Finance Peggy Serame disclosed that last year, over P8 billion was repatriated to comply with these regulations.
Historically, pension funds have predominantly directed their savings offshore. These funds struggled to find investment opportunities within the local exchange, even beyond the BSE. Approximately 70% of pensioners’ life savings were previously invested in offshore markets. Even so, Bolokwe noted that liquidity continued to accumulate locally despite these circumstances.
“ETFs have been one of those innovative instruments that are able to import instruments into the country because they come by way of secondary listings.”
Cash versus assets imbalance
Arguably, there’s an imbalance with too much liquidity chasing too few assets, as evidenced by the decline in cash returns. Cash holdings by pension funds surged by almost 40% from December 2022 to December 2023. Bolokwe noted that where fund managers are looking for stocks on the BSE, it has taken a bit of time, and takes a tactical approach.
“Instead of putting this money into a bank account, they would put it into ETFs provided they have a very reasonable outlook performance of the underlying asset,” Bolokwe said adding that if you are investing in NewGold you are investing in actual gold.
“So you have the outlook of geopolitics and how they would impact the price of gold.”
Diversification opportunity
He stressed that ETFs provide diversification opportunities.
“We all agree that we have a few stocks on the exchange about 33 and a couple of bonds. While you are holding bonds and equities there is an opportunity to now invest in a product whose performance is most likely not measuring the performance of those assets or instruments you already bought.”
Equities versus ETFs
Over a span of 10 years leading up to the onset of COVID-19, the BSE faced a scenario where the equity market witnessed a downward trend with prices declining. Such occurrences typically impact investor confidence and participation levels. However, there was a notable uptick both during and post-COVID-19. This momentum has endured, evidenced by significant gains. In the previous year alone, the Domestic Company Index Total Return Index (DCITRI) surged by 25.5%, according to Bolokwe. Meanwhile, the DCI, excluding returns, experienced a 15.5% increase.
Arguably, Bolokwe mentioned that during the period of market downturns, opportunities arose with commodity-backed ETFs as well as those tracking equities and fixed income from other countries. He said the NewPlat in particular has posted phenomenal returns.
“We listed it at P83, it’s way above P240 now. Since its listing, it’s up by 208%.”
“So there are pockets of opportunities that it presented while the equity market was on a downward trajectory that you could have explored to enhance your yield either from a strategic or tactical point of view,” Bolokwe said adding that “other ETFs as well have done well, others have not done well.”
He noted that given the multitude of ETFs tracking commodities, equities, and fixed income, investors have the opportunity to evaluate investment prospects in each and determine the most advantageous ways to capitalise on them.
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