Helena Conradie

Few people associated the Satrix range of exchange traded funds (ETFs) with Sanlam. First its high-profile MD, Mike Brown (not to be confused with the head of Nedbank), was Mr Satrix, then Max Koep of Deutsche Securities, which owned half the business, adopted that role.

But all along the Satrix funds were managed by Sanlam's sim.smartcore team under Helena Conradie, and Sanlam owned the other half of the business. The team also manages the Proptrax property tracker and several ETFs for Absa.

Sanlam recently bought out Deutsche's share of Satrix. It now has control of the most powerful brand in SA indexation.

Indexation or passive investing has not been successful in SA to date, taking less than 10% of fund flows. Some index funds have converted to more active mandates, notably the Investec Index Fund which has changed to Investec Active Quants.

Conradie says index funds used to be sold as a competitor to active management. "They should play a role as the core of a portfolio, with active managers used for excess returns."

Len Jordaan, a portfolio manager at Stanlib's alternatives unit, says with the changes to regulation 28 of the Pensions Funds Act, pension funds can now invest up to 10% of their portfolio in alpha (return) generators which are not correlated to equity markets, such as hedge funds and commodities. "They can then focus on index funds to provide pure beta [market performance]."

But it is difficult for retail investors to access these. Because of regulation, Conradie had to abandon her interesting 130/30 "hedge fund lite" product which would gear up modestly so that the short positions were equivalent to 30% of invested capital and long positions 130%.

Conradie says there has been product innovation into what is called Smart Beta. This doesn't simply replicate an index but creates a new one with its own filters. The most successful has been Satrix Divi, which tracks high dividend shares and which outperformed every general equity unit trust last year.

One which gets a lot of air time is the Rafi, or fundamental index. This ranks shares not by market cap but on four metrics: cash flow, sales, dividends and book value.

Conradie says that with the Satrix purchase Sanlam has the only fully integrated index fund business, running from fund management, product development, administration and distribution.

It is also entirely neutral on the topic of whether to go the ETF or unit trust route. For professional investors who need to trade throughout the day, ETFs are the answer as their price changes along with market movements - unit trusts price just once a day.

Conradie says ETFs and passive unit trusts are both considerably cheaper than active funds, particularly when trading costs are considered. Even with trading, index unit trusts will come out at a 0,7% total expense ratio, ETFs at 0,5% while active funds will nudge 1,8%.

She says retail investors who are prepared to buy a fund directly from the management company such as Sanlam Collective Investments can get in at no platform fee. In contrast, for ETFs, the investor must either pay up to 0,7% to a stockbroker or, for a recurring contribution, up to 0,8% to an ETF investment plan. Investors in a linked product will probably find it more convenient to bundle their index fund portfolio into their linked investment portfolio at a 0,5% fee.

And she suggests that large institutional funds, with R100m or more to invest, set up a segregated portfolio for long-term assets and use ETFs for tactical investments.

So far Satrix has focused on equity products but, as a wholly owned division of Sanlam, it will soon introduce other asset class index funds, with property, bonds and balanced funds