BSE acting CEO Kopano Bolokwe
NewGold surged over 270% since listing vs 30% for equities over the same period
The remarkable performance of the NewGold ETF since its listing on the Botswana Stock Exchange (BSE) in 2012, lays credence to growing evidence that passive investing can significantly outperform active investing.
Both strategies have their merits, but research indicates that, on average, passive management strategies tend to outperform active managers. Stock picking is both an art and a science. Investment experts say if one opts to invest in individual stocks, they face the herculean task of picking the right one. Passive strategies generally deliver better performance over time, as proven by NewGold ETF.
NewGold outperforms local equities
NewGold ETF has surged 271% since its listing in 2012, significantly outperforming the overall market performance of the BSE, according to Kopano Bolokwe, Acting CEO of the exchange who was speaking during Absa Bank’s ETF Webinar. Over the same time, he observed that the overall market, as measured by the domestic company index (DCI), has only increased by 30% since the NewGold ETF was listed.
On a year to date, the NewGold ETF has risen by 24%, surpassing the equity market's performance. On a total return basis, Bolokwe said equities printed an increase of just over 16% on a total return perspective, while on a price basis, the rise is close to 8%.
“In our interaction with institutional investors, we found that they tend to use ETFs for tactical purposes, with the understanding that our market is fairly liquid,” Bolokwe said noting that this has enabled some of the asset managers to outperform their peers at a certain point in time.
ETFs allow investors to gain exposure to a diverse range of asset classes. With the NewGold ETF, investors can gain significant exposure to gold, a commodity traded on global markets and priced in dollars. This means that fluctuations in global markets, whether due to stock market volatility or geopolitical tensions, are reflected in the fundamentals of gold and, consequently, in the performance of the NewGold ETF on the BSE.
ETFs are cost-efficient
On the BSE, Bolokwe said trading fees for ETFs are significantly lower compared to those for equities. For example, he said the commission for trading ETFs ranges from 0.2% to 0.5%, whereas the commission for trading equities can be as high as 0.8%. This illustrates the cost efficiencies of ETFs because they are passive instruments.
Passive outperforms active investing
Empirical research shows that it is challenging for active management strategies to outperform passive investment approaches. Essentially, if one is trying to beat the market with an active strategy, it's often difficult to surpass the performance. A report by S&P compared the performance of active managers against their benchmarks, the indices. The report found that, globally, it is quite rare to find an asset manager who consistently outperforms their benchmark, which is typically a passive index strategy. Consequently, an actively managed approach will unlikely outperform the index or the ETF that mirrors it.
Increasing funds into ETFs
Michael Mgwaba, Head of Exchange -Traded Products Business at Absa Bank Botswana, observed that money has been increasingly flowing into ETFs because passive strategies tend to outperform active ones.
ETFs have experienced significant volatility. Until recently, Herbert Kharivhe, Equity Researcher - Mining at Absa Bank observed that there have been notable outflows, with Eastern markets buying while Western markets were selling. Even with four months of inflows since May, Kharivhe said ETFs are still in at least a billion-dollar loss year-to-date.
“But overall, the key change here has been that in the West, we saw the ECB cut rates. We saw Canada cut rates, and on the back of that, the West started climbing back into gold ETF. And more recently, at least from the US, the past two months, we've seen inflows,” Kharivhe said.
In terms of physical holdings, he said the market is significantly below what it saw at its peak in 2020. If the US rate cuts materialise, he believes “we can see more, or rather increased buying from the West”.
All things equal, high interest rates are negative for gold. Rate cuts will be perceived to be positive because with high interest rates, the cost of holding gold increases given that gold is not a yielding asset. Money or asset allocators prefer yield.
Gold improves risk-adjusted return
The story of NewGold and Gold is that it reduces volatility; the noise on the portfolio, according to Mgwaba. “It improves the risk-adjusted return. That is what a normal investor would look into.”
Gold miners’ performance
If you had invested in African Resources, which is a gold miner in South Africa miner, you would have done very well, Kharivhe said noting that it is 72% higher year-to-date. “But on the other hand, if you had invested in DRD (Gold Miner), you would be minus 11.8% in the red.”
What he is emphasising is that stock picking is an art and science. Hence “if you choose the option to go with stocks, you also have the herculean task of picking the right one”.
Even though the gold price has been doing well, he said that benefit has not filtered down to all the stock in the sectors.
“Some companies have done extremely well. Others have not done as well. If you choose to go with the metal and not the stock, the metal provides diversification,” Kharivhe said.
What he means at the simplest level is that when equities are going up or down, gold is likely to be unaffected.
“Those who prefer stocks would normally argue that gold is not going to pay a dividend. It yields nothing,” Kharivhe said. The counterargument in that case for him is that “I will never wake up to a headline that says gold bought silver or bought another company.”
“I would never wake up to a headline that says the company is going through tough times. We need more money, and let's do a rights issue, and so on.”
Behind the Gold Surge
Gold has gained 21.8% year-to-date and 30% over the past 12 months, according to Kharivhe. In comparison, stocks are trailing slightly with a 20.6% increase, as indicated by the GDX ETF, which serves as a proxy for gold stocks. Meanwhile, the S&P 500 has rallied 16.4% year-to-date.
Kharivhe explained that most of the price action is on the demand side of the equation; ETFs, central bank buyers, jewellery fabrication and technology.
“Perhaps the primary driver at play right now is Fed policy,” he said, explaining that geopolitical events tend to be short-lived.
For example, the Russia-Ukraine conflict in 2022 initially caused a surge in gold prices of around 7.7%. Although some argue that when the bullets started flying, the US raised rates which quickly tapered off any gains.
The conflicts in the Middle East, including the Israel-Hamas situation and the additional involvement of Iran, initially led to a 9.5% increase in gold prices, according to Kharivhe.
De-dollarisation implications
Another significant takeaway from the Russia-Ukraine conflict shared by Kharivhe is the trend of de-dollarisation. Russia has seen substantial losses, approximately $40 billion in U.S. Treasuries and around $200 billion in European Treasuries, due to sanctions.
“So on the back of that, that has changed how money flows globally,” he said. “Previously, if you had a surplus in your forex needs as any other country, you would normally park your money in US Treasuries.”
Kharivhe said after the US and Europe took over Russian holdings, BRICS nations and a few other nations now have surpluses in terms of their fiscal budgets and they are choosing to park those surpluses in gold.
“So you will have noticed that also, the auctions in US Treasuries are not performing as well as they used to, and that is because the likes of China, which historically had built a position of, at the peak, close to $1.2 trillion have been unwinding and choosing not to add to their positions.”
Central Bank gobble a third of the supply
According to Kharivhe, around one-third of global supply is now going to central banks. Annually, he said gold miners are producing around 3,300 tons, with central banks taking a little over 1000 tons annually.
“So overall, central banks purchasing has been quite significant since 2022 and also that is because fiat currencies have been depreciating now.”
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