Satrix RAFI

Satrix has launched its seventh Exchange Traded Fund (ETF) on 16 October 2008. One of the unique features of this portfolio is the tracking of a fundamental index™ , the FTSE/JSE RAFI 40 Index. This index weights the underlying constituents using four fundamental factors, rather than pure market capitalisation. These four factors are dividends, cash flow, sales and book value. Secondly, Satrix RAFI 40 will track the total return version of the FTSE/JSE RAFI 40 index, measuring the total return of the underlying index by combining the capital performance plus the reinvestment of income of the constituent companies in the index. All dividends received from underlying constituents will be immediately reinvested into the portfolio.

What makes Satrix RAFI 40 different?
Most stock market indices are calculated using the market capitalisation method. Stocks qualify for inclusion in the index based on the market value of the underlying company. Using fundamental indexation methodology™ developed by Research Affiliates LLC, the index diverge from the traditional price based market capitalisation weighted design and instead derives its constituent weights from company fundamentals. The methodology uses the following factors to derive each constituent index weight.
 

1. Sales represent the company sales averaged over the prior five years.
2. Cash flow is the company cash flow averaged over the prior five years, defined as operating income plus depreciation.
3. Book value represents the company book value at the review date.
4. Dividend is the total dividend distributions averaged over the last five years, including both special and regular dividends paid in cash.

Outlined below are a number of the additional features of the FTSE/JSE RAFI 40 index:
 

1.  Fundamental weighting aims to not increase exposure to high P/E stocks during episodes of unsustainable P/E (Price Earnings) expansion. It therefore aims to avoid over-exposure to the more overvalued stocks.
2. Stocks are liquidity screened to ensure the index is tradable.
3. The index is calculated in accordance with the Industry Classification Benchmark (ICB), a global standard developed in partnership between FTSE Group and Dow Jones Indices.
4. The index is managed according to a transparent and public set of index rules, and overseen by an independent committee of leading market professionals. The committee ensures that the rules are correctly applied and adhered to. Regular index reviews are conducted to ensure that a continuous and accurate representation of the market is maintained.

Tracking the total return version of this index would mean reinvesting any dividends declared by a constituent company in the total return index (TRI) immediately upon receipt of such dividend. The amount reinvested would be announced from time to time.

What is fundamental indexation™?
Fundamental Indexation is simply changing the basis for weighting the stock in an index. Companies are weighted by market capitalisation, which can lead to an overweighting of overvalued companies and an underweighting of undervalued ones. Fundamental indices focus on metrics such as sales, making it easier to identify the most undervalued companies.

The process starts with the selection of the company universes. The universe of companies is each ranked by the fundamental measures (book value, cash flow, sales and dividends) of the company size. A composite fundamental value is given to each company by taking the average weighting of each fundamental measure. The companies are then ranked in descending order of their RAFI fundamental values. The weights in the indices are set proportional to their fundamental values.

Performance

 

Low Cost 

Satrix Rafi 40 does not charge substantial management fees or other advisory and ongoing costs, common to other managed investments. The income Satrix earns from scrip lending activities further reduces the cost to the investor.

There are two levels of costs that will be incurred by the investor. The first being portfolio expenses and the second being fees that you will incur depending on the investors preferred channel of investment.

Portfolio expenses
Portfolio expenses include fees incurred to run the Satrix Rafi 40 portfolio such as management fees paid to Satrix Managers, custodian fees, brokerage, auditor’s fees, bank charges and taxes.
All these fees are permissible deductions from the portfolio and are paid from the dividends that accrue to the portfolio (from the underlying shares in the portfolio) and the other income that accrues to the portfolio (interest and scrip lending income). The balance of the income remaining in the fund after deduction of the permissible fees and costs referred to above is distributed to the holders of the Satrix securities. This distribution is done on a quarterly basis.

Therefore the portfolio expenses are incurred by the investor when the distribution is paid out. For investors to be informed of this cost on a quarterly basis, the unit trust industry uses the concept of a total expense ratio (TER). TER is used to illustrate the costs of portfolios on a comparative basis. Its objective is to endeavour to satisfy the requirement of transparency and to establish an industry standard. The TER of the Satrix Rafi 40 for the quarter ended 31 March 2012 is 0.5275% (incl. VAT).

In accordance with the industry standard, brokerage and scrip lending income are excluded from the TER. Satrix accordingly also publishes an actual expense ratio (AER), which includes brokerage expenses and scrip lending income. 

Satrix Rafi does not engage in scrip lending. Accordingly scrip lending income which is included in the AER will not be received by the Satrix Rafi portfolio.

Satrix Investment Plan and broker fees
Broker fees, financial advisor fees (applicable if a financial advisor has been consulted) and Satrix Investment Plan fees are costs that will be incurred by the investor depending on the investors preferred channel of investment and does not include the portfolio expenses as set out above.

Broker fees and financial advisor fees could vary depending on the broker and/or financial advisor being consulted.

In the case of the Satrix Investment Plan, which is administered by Automated Outsourcing Services (AOSL), transaction costs (brokerage) of 0,1% is levied on purchases and sales of Satrix securities. Annual management fees, charged by AOS, are as follows:

Investment Plan Administration Fees (for both lump sum and debit order investments)
Annual administration fee: (calculated daily and deducted quarterly)

 

Transaction Fees
Debit order fee: R3.50
Stock brokerage fees: 0.10% (buying and selling)
Nominal Strate and Investor Protection levies will also be charged.
Where a financial adviser is used, commissions will be charged (as scheduled in Section 8).
All fees quoted are exclusive of VAT. VAT will be levied where applicable

Satrix RAFI is traded all day on the JSE and its price is subject to trading in the marketplace. The price of Satrix securities can be obtained from any media publication that reports JSE prices.

All settlement, registration, recording and guarantee of trade are done through the normal JSE market systems.

Official market makers have been appointed by Satrix to ensure that investor´s transactions will be accommodated in the market.

Regulation and Disclosure
Satrix RAFI is subject to the same regulations, reporting and compliance requirements of any listed company on the JSE. Satrix RAFI is also registered as a Collective Investment Scheme and is therefore subject to the regulation of the Financial Services Board. Satrix Managers (Pty) Ltd is registered as a Financial Services Provider.