LAS was mainly accessed by foreign companies with mining interests
Is it an issue of where that instrument is listed or the return source?
We had to be innovative given the lack of instruments – BSE
BSE will introduce depository receipts
At a recent Breakfast Seminar organised by the Botswana Insurance Fund Management (BIFM), exchange-traded funds (ETF) generated heated debate over their true asset status. The discussion between regulators and market players centered around local asset status (LAS) and their fundamental revenue which is derived through international capital markets. Exchange Traded Funds (ETFs) are passive investments pegged to the performance of a particular index or commodity (for example diamonds, gold etc.), which can be accessed by retail and corporate investors, benefiting from the performance of the underlying asset/index/commodity even though it may not be listed on the BSE.
This is why market players think there is a need to have a conversation about what the real and relevant positioning of such instruments would be in the case of Botswana. Can we really call them out to be domestic instruments when the return is derived from international capital markets? Is it an issue of where that instrument is listed or the return source?
The LAS Policy was introduced by Government in 2000 and administered through the then Pension and Provident Funds Act (1987), which introduced pension fund asset investment limits (minimum local investment of 30 percent, offshore investment ceiling of 70 percent). LAS, according to Non-Bank Financial Institutions Regulatory Authority (NBFIRA) catered for foreign investors to access 30 percent of pension fund assets reserved for local investment.
The voice of Kopano Bolokwe was the loudest during this conversation at the seminar. “Anything listed on the BSE (Botswana Stock Exchange) even if they have external underlying assets listing is domestic,” Bolokwe, the Head of Product Development at the exchange responded to some of the questions. The reality is these are foreign assets, Bolokwe continued. But because of the unique problems Botswana faces here in the market (lack of instruments and abundant cash), Bolokwe explained that “we had to be innovative on how we bring instruments that could absorb the cash here”.
The amount of money held by pension funds in Botswana has jumped dramatically with cash currently accounting for 21%. Keith Jefferis, a Respected Economist, in his presentation argued at the seminar that pension funds should not be holding such a high proportion of cash. “That’s not ideal,” he said.
Bolokwe in his remarks explained that coming up with the designation of local assets status was one of the ways of saying, it is a foreign asset, as in the underlying, is outside Botswana but it would be treated as a local asset. Bolokwe cited Anglo-American, and Lucara Diamond which are primarily from foreign stock exchanges but are regarded as Botswana companies.
NBFIRA is the custodian of the LAS policy through the PFR2 and, therefore, authorises requests by foreign entities that wish to access the pension fund assets reserved for local investment, subject to satisfying the set criteria. Oudetse Motshidisi, the authority’s CEO said upon the introduction of LAS, it was mainly accessed by foreign companies with mining interests in Botswana, to stimulate the development of the local mining industry. “Some of the foreign mining entities were dual listed on the Botswana Stock Exchange, meaning that they had primary listing in a foreign country,” Motshidisi said in response to media questions. “It is worth noting that an entity being listed on the BSE was one of the main criterion to be granted LAS, however, it was not restricted only to dual listed companies.”
In granting the status, Motshidisi explained that the main consideration is whether the investment by pension funds will create economic activity and development in Botswana. The criteria will include whether;
the project or company is based in Botswana;
the project will create employment for Batswana; and
will funds be invested in Botswana.
Ordinarily, Motshidisi said ETFs will not meet the above-stated criteria and will have to be dual-listed on the BSE to qualify. In Motshidisi’s view, dual-listed ETFs contribute to the economic development of Botswana in that there will be;
employment of local service providers such as brokers, lawyers, banks, the BSE`s CSD etc.;
skills transfer and opportunities for local analysts to look at international assets that they would otherwise not have access to;
collection of Government revenue, for example VAT on ETF transactions on the exchange
Issuers of the ETFs apply for local asset status with NBFIRA and they are granted that for it to be recognised as a local asset to be credible to reserve domestic asset allocation, Bolokwe said.
Bolokwe assured his audience that there is that look-through to see where their underlying are actually located and that is exclusively for reporting purposes. The issuer of an ETF would have to report where the underlying assets are located so that an investor knows about the geography of these shares.
A comment from the floor argued that pension funds can still access the likes of Nasdaq, and MSCI through their international portfolios. The new PFR2 regulation emphasises a drill-through basis with respect to asset allocation.
Yes, asset managers are able to go directly to offshore markets but Bolokwe argued that ETFs present another opportunity “If you bring offshore instruments that categorise local to Botswana to provide opportunities for your enhancement for alpha for the same asset managers through segregated mandates, through trusts for individuals as well.”
“The reality is that we don’t have blue chips, we are not getting any soon,” Bolokwe said adding that “we have to be creative in terms of how we bring instruments to the exchange.” This, he said, is not limited to ETFs. In no time, BSE will have depository receipts. In America, they call them American Depository Receipts. “You will be able to buy shares of Google through an instrument called receipts. Those will apply for local asset status,” Bolokwe said. “The local asset status helps the pension funds in terms of enabling the desire to allocate some of these cash to these instruments for alpha, yield investments, for diversification also.”
During the year to 31 August 2023, total ETF turnover amounted to P194.3 million, a significant increase of 86% from P104.6 million registered during the corresponding period in 2022. This was recorded from 1,123,244 units traded thus far in comparison to 693,568 units during the same period in 2022. The NewGold ETF and NewPlat ETF gained 11.9% and 11.2% while the Satrix ILBI ETF and ADBF ETF lost 3.2% and 8.4% respectively in 2023.
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