AMCs: ‘Kind of like fancy unit trusts, but listed’

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SIMON BROWN: I’m chatting with Nerina Visser, you find her of course at etfSA. Nerina, I appreciate the time today. AMCs – actively managed certificates – are relatively new to the JSE. They came in towards the end of last year. Fair to say they’re kind of like fancy unit trusts, but listed.

NERINA VISSER: That’s a great description, Simon. Indeed – ‘fancy unit trusts, but listed’. But maybe also [with] the ability to have some things that are not normally easily accessible via unit trusts. Unit trusts of course, the underlying funds governed by CISCA, [which is] the Collective Investment Schemes Control Act, which also legislates what type of underlying assets may be held in a unit trust. And from that perspective, these AMCs are much like listed unit trusts, but then with a bit more as well, which is great.

SIMON BROWN: And a bit more of that, I imagine. Obviously there’ll be equities, there’ll be bonds –  local, offshore – that sort of bog standard. Commodities is the one space where unit trusts don’t touch that at all, unless they’re going for the miners.

NERINA VISSER: Exactly. So physical commodities, yes. Not something which one can hold in a Cisca fund – or in a unit trust, in other words. The other aspect also is the use of derivatives. So within a unit trust not only is the extent of derivatives usage restricted, but it’s also typically only allowed for efficient portfolio management. As the legislation says, you can’t speculate and you can’t do all sorts of funky stuff with it. It’s mostly for efficient portfolio management.

So those commodities and derivatives are probably the two major departing points, I would say.

SIMON BROWN: And then when you were at the Money Summit Leader X  last week – I missed it, I was on a different panel – you were talking ETFs, you liked the global; I forget what the second one was. And then the third was–

NERINA VISSER: The Satrix Capped All Share ETF was the other one that I chose.

SIMON BROWN: Then the Coherent Capital Global Commodity AMC code – CCMGCZ. Talk to us around this. I hadn’t heard of it. I’m aware of AMCs, but this one in particular I hadn’t heard of.

NERINA VISSER: A truly unique offering that we have on the JSE, Simon. It is one of the first AMCs that came about. It listed in November last year, so it’s been around for almost 10 months already. What we really like about this is that we know that physical commodities, unlike mining companies – and we can come back to that – but physical commodities represent a great source of diversification in a traditional portfolio.

Whether that traditional portfolio mostly focuses on equities or maybe interest-bearing and so on as well, physical commodities really act as a great risk diversifier, and I think that’s one of the reasons why [they are] so attractive.

But the other reason why this is very attractive for us is exactly the fact that it is actively managed because when you look at commodity prices typically, these are not things that tend to have a lovely upwardly sloping positive trend line [chuckling], as one would expect from many other types of investments. These things are cyclical.

We all know the cyclicality of things like oil prices, the gold price. A lot of these prices are a lot more cyclical, if not predictable. They certainly mostly over the long term move sideways. In other words, the only way that you can actually capture value, investment value, from commodity prices is to actively manage and actively trade them when they are in an upward trend within the cycle. They don’t pay any distributions – no interest, no dividends and so on – and so really you need to capture that positive price performance when it’s available, and then actively trade out of it when the curve turns, and move into something else which is now in an upward cycle.

SIMON BROWN: That’s the key thing. You said up front it’s around a good old-fashioned diverse portfolio. Back in the day, back in my grandfather’s day, that meant some Krugerrands,  quite simply. But now of course the range of commodities is so much wider than just gold.

NERINA VISSER: Indeed. You’re absolutely right. For many it used to be mostly gold. But, interestingly enough, I think the diversification benefits of gold traditionally have been more about downside protection. Gold was typically the asset that would zig when everything else has zagged [chuckling]. So we would use these in portfolios to protect us against downside in a really negative environment.

Whereas, when you’re looking at this broader range of commodities – and here we are talking about the three big groupings being energy commodities, agricultural commodities, and then metal commodities – of course these things have also all been around for the longest time.

But it’s never been easy for especially retail investors to invest in these. Gold used to be easy through Krugerrands. Of course we also have different gold and other precious metal ETFs, so you can also buy the NewGold ETF or the 1nvest Platinum ETF, for example. But access to energy commodities and agricultural commodities can be done only through derivatives.

That’s why I come back to the point that I made earlier on – the ability to use derivatives. If you think in terms of commodities such as oil and wheat and so on, you can participate in the price movements only through the use of derivatives, futures contracts, forward contracts, or these sorts of things. So to allow an investor access to that price performance, you really need this unique structure of the actively managed certificate, which allows for the investment in these derivatives to really now provide you that exposure; when we say ‘energy’, we are talking not just of oil, we are also talking of coal, we are talking of natural gas and so on.

When we say ‘agriculture’, we are not just talking of wheat, we are also talking of things like livestock, cattle, cocoa, sugar, and the so-called soft commodities.

And then of course, under the ‘metals’ spectrum, we typically think in terms of mostly gold and PGMs – your platinum group metals. But of course there’s also your industrial or your base metals, so things like copper and zinc and aluminium and a whole range of other metals that are very much used in the production, in the manufacturing processes of economies.

SIMON BROWN: I take your point. As you started listing more and more, I realised why we need actively managed, because there’s just more than on my plate. That’s just it. So the manager here will say, well, wheat has had its day in the sun. It’s another commodity that’s coming to the position, and it means we can hold them passively, notwithstanding this [being] an active product.

NERINA VISSER: Exactly. So for the investor this is effectively a passive investment. It’s a buy-and-hold investment. It’s something that you can afford to buy and just hold in your portfolio. I love this. Andy Pfaff, the portfolio manager who manages this, uses a beautiful analogy: ‘This is like a swan on a lake. From a distance it looks beautiful and sailing smoothly. Meanwhile, underneath, that swan is paddling furiously.’

I think that’s what active management does for you. There is a manager that’s paddling furiously underneath the surface to keep the performance of this for you.

I might just add, since it listed in November last year we’ve seen an over-14% growth in price performance from it over the 10-month period. Just by contrast, the Resources Index, our traditional mining company investments, are  down over 12% over that same period – which so clearly demonstrates that an investment in a mining company or a resources company is something very different from an investment in a basket of physical commodities.

SIMON BROWN: I like this Coherent Capital Global Commodity – AMC CCMGCZ is the code. Nina Visser from etfSA, I always appreciate the insights.

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