Want to sell Namibian bonds to foreign investors? Bundle them and unitise the fund
It took approximately a year for Cirrus Capital and Absa Capital to get all the elements in place to list their new exchange traded fund (ETF) but that process came to a conclusion just over a week ago with the cash listing of the Newfunds S&P Namibia Bond ETF.
This final step in bringing the ETF to a tradeable investment instrument on the Johannesburg Securities Exchange (JSE) with a dual-listing on the Namibian Stock Exchange (NSX), was preceded earlier in November by the so-called in-specie subscription when prospective investors had the opportunity to cede their existing Namibian sovereign bond holdings in exchange for ETF units.
Romé Mostert, Director and Co-founder at Cirrus Capital explained that the ETF is a collaboration between Cirrus Capital and Absa Capital, who are the originators of the idea to establish an ETF based on a basket of assets in the ten largest Namibian government bonds. The ETF is unique in the fact that it is the only ETF in the world to only hold Namibian assets; and it is the first time investors can buy Namibian Government debt in a dematerialised form.
The Newfunds S&P Namibia Bond ETF replicates the Total Return version of the S&P Namibia Sovereign Bond 1+ year Top 10 index. The index is rebalanced every month and reconstituted every quarter. Only bonds with a maturity of one year or more, are included.
The attractiveness for foreign investors is that they now have a product available in South African currency with exposure to a range of preselected bonds in a unitised instrument that can be traded on the JSE with liquidity guaranteed by the market makers , Absa Capital Securities and Cirrus Securities.
The ETF is registered in South Africa as a collective investment scheme under the Collective Investment Schemes Control Act. It was approved for listing on the JSE and NSX, with in-specie subscriptions listed on the exchanges on Tuesday 26 November and the cash subscriptions listed on Friday 6 December.
One of the fund’s attractive features is that as an ETF, the total expense ratio amounts to only 10 basis points or 0.1%. This is the cheapest ETF listed on the JSE. Mostert explained that a capital investment of roughly N$500 million is required for the very low trading fee to be viable, stating at the same time that Cirrus Capital expects to cross this benchmark early in 2020.
On the reason for listing a locally-traded ETF with Namibian sovereign bonds as underlying assets, Mostert said it is crucial for the further development of the local capital market to put in place a mechanism on a liquid market to open trading in Namibian bonds to foreign investors. This is the reason why they chose the JSE and why they decided to use S&P Dow Jones Indices to compile the index.
“Considering Namibia’s trade deficit on the balance of payment and the government’s annual borrowing requirements, the local capital market is in desperate need to attract foreign inflows to avoid further increases in the local asset requirements under Regulation 13.” he concluded.
The Newfunds S&P Namibia Bond ETF comprises a weighted basket of the GC22, GC24, GC25, GC27, GC30, GC32, GC35, GC37, GC40 and GC 45 bonds issued by the Namibian Government.