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Notification in respect of suspension provisions of the deed establishing the CoreShares Preference Share ETF
CoreShares Index Tracker Managers (RF) Proprietary Limited
CoreShares PrefTrax
Share code: PREFTX ISIN: ZAE000185658
("PREFTX")
Portfolios in the CoreShares Index Tracker Collective Investment Scheme registered as such in terms
of the Collective Investment Schemes Control Act, 45 of 2002, managed by CoreShares Index
Tracker Managers (RF) Proprietary Limited (“CoreShares” or “the Manager”).
Notification in respect of suspension provisions of the deed establishing the CoreShares
Preference Share Exchange Traded Fund
1. BACKGROUND
CoreShares is an approved Manager of collective investments schemes and has two schemes in
securities namely, the Coreshares Index Tracker Collective Investment Scheme and Coreshares
Collective Investment Scheme.
CoreShares have issued a letter to investors in the CoreShares Preference Share Exchange Traded
Fund (“CoreShares Preftrax ETF”), a portfolio established under the Coreshares Index Tracker
Collective Investment Scheme and listed on the JSE Limited (“JSE”), the contents of which is
detailed in this SENS announcement. The letter is available on the CoreShares website at,
https://coreshares.co.za/fund/coreshares-preftrax/.
The CoreShares Preftrax ETF passively tracks the FTSE/JSE Preference Share Index (“the J251
Index”). The CoreShares PrefTrax ETF was approved by the Financial Sector Conduct Authority
("the Authority” or “FSCA”) on 02 December 2013.
2. THE FTSE/JSE PREFERENCE SHARE INDEX
When the CoreShares PrefTrax ETF was first established, there were 17 preference share listings
which qualified for inclusion in the J251 Index, this has reduced to 9 as of 31 July 2022 and is
expected to reduce further with current preference share listings due to redeem.
Historically the J251 Index has been dominated by the large bank issuances making up roughly
80%. The banks initially issued these preference shares to raise permanent share capital which also
qualified as Tier 1 capital in terms of their capital adequacy requirements.
Current construct of the J251 Index as at 31 July 2022, is detailed below:
Constituent Weight
Standard Bank Group Limited 23%
Absa Bank Limited 22%
FirstRand Limited 21%
Investec Limited 15%
Steinhoff Investment Holdings Limited 6%
Discovery Limited 4%
Grindrod Limited 3%
Invicta Holdings Limited 3%
Netcare Limited 3%
Source: FTSE/JSE Indices
3. RESTRUCTURE OF THE PREFERENCE SHARE MARKET
The market has seen a steady reduction in bank issued preference shares listed on the JSE with
several preference share issuances having already redeemed, this mainly due to the change in Tier
1 capital classification introduced in the Basel III regulatory framework. The remaining bank issuers
have been slow to make changes to their issuances however, recently FirstRand Limited
(approximately 21% of the J251 Index) has announced their intent to redeem its issuance by way of
a scheme of arrangement, in the coming months.
4. IMPLICATIONS OF THE RESTRUCTURE TO THE J251 INDEX
4.1 Buy backs resulting in upside for clients
The nearer term result for clients has been positive. This is because, as the banks have been
redeeming their preference shares, they offered values which represented premiums to the
trading prices. This has resulted in significant upside for investors as depicted in the “FTSE/JSE
Preference Share Total Return Index” graph, included in the letter to investors.
4.2 Medium term implications
The medium-term implications are more challenging as it would be inappropriate for the
portfolio to invest in the remaining constituent preference shares with the cash received as
further large preference share constituents redeem. This will lead to both large single
preference share exposures and liquidity issues for the CoreShares PrefTrax ETF.
5. SUSPENSION OF THE CORESHARES PREFTRAX ETF’S INVESTMENT POLICY PROVISIONS
In order to mitigate the liquidity risk posed by the structural change within the JSE listed preference
share market, the Manager has sought permission from the Authority for suspension of the following
paragraphs of the CoreShares PrefTrax ETF Deed in terms of section 97 (3) of the Collective
Investment Schemes Control Act, 2002 which has been granted;
• paragraph 4.4 (insofar as it relates to the alignment of the portfolio with the J251 Index);
• paragraph 4.7 (relating to the aim to be invested in at least 100% of the preference shares
comprising the J251 Index under “normal circumstances”); and
• paragraph 4.9 (relating to assets in liquid form constituting a minor part of the of the portfolio’s
assets).
The Manager has received permission for the suspension of the above provisions from the Authority
for a period of 12 months with effect from 2 September 2022 premised on the current circumstances
being “abnormal” and enables the Manager to invest a proportion of the portfolio into cash assets to
alleviate the liquidity risks faced by current investors.
During this temporary suspension period, the Manager intends to re-mandate the fund under the
normal FSCA and JSE ballot procedures and timelines, in the coming months, to a suitable strategy
delivering similar outcomes for existing investors.
6. CORESHARES PREFTRAX ETF IMPLICATIONS DUE TO THE SUSPENSION OF INVESTMENT POLICY PROVISIONS
6.1 The expected tracking error (clause 4.5 of the investment policy)
Using the last three years of data, investors have come to expect the tracking error of the
CoreShares PrefTrax ETF to be within the range of current tracking error of 0.5% to 1%. This
could increase up to 2.7% (with 20% of the fund invested in cash) and up to 15% should all the
bank preference shares redeem in quick succession. Please note that the tracking error as
defined here is the standard deviation of return differences between the CoreShares PrefTrax
ETF and the J251 Index, it is a statistical measure and not equal to return drag (i.e., Index
Return – ETF Return).
6.2 Portfolio return (clause 4.6 of the investment policy)
At present the Manager will continue to achieve a return that tracks the price and yield
performance of the J251 Index as there is still sufficient liquidity in the underlying constituents
making up the J251 Index. However, it is anticipated that on the next preference share
redemption the manager will replicate the J251 Index as far as possible. This will approximately
equate to an investment into the Preference Share Index of 100% minus the weight of the bank
preference share redeeming from the market, this weight will be invested in cash.
Under normal circumstances, investors would have expected the price and yield performance
of the J251 Index. In this instance the CoreShares PrefTrax ETF will not be 100% invested in
the J251 Index and investors would receive the composite return profile of the FTSE/JSE
Preference Share Index (for e.g.,80%) and the cash return (where the balancing proportion is
invested in cash for e.g., 20%). The table below shows the historic returns of a hypothetical
ETF invested 100% in preference shares and then the corresponding ETF scenarios stepped
in 20% increments to 100% cash (1). This table is for illustrative purposes only and is based off
historic return and risk statistics so is by no means an indication of future returns. Past
performance is not indicative of future performance.
Hypothetical ETF scenarios: Preference Shares and Cash
80% 60% 40% 20%
100%
Preference Preference Preference Preference 100%
Preference
Shares Shares Shares Shares Cash
Shares
20% Cash 40% Cash 60% Cash 80% Cash
Annualized Return (1) 9.4% 8.7% 8.1% 7.4% 6.8% 6.1%
Annualized Volatility (2) 15.6% 12.5% 9.4% 6.2% 3.1% 0.1%
Risk Adjusted Return (3) 0.25 0.26 0.27 0.31 0.40 NA
1. Past performance is not indicative of future performance; The above table illustrates the average annual
performance of the FTSE/JSE J251 Preference Shares TR Index and the STEFI Composite TR Index
over a period of 10 years ended 31 July 2022.
2. Volatility is measured by three years daily price change standard deviation.
3. Risk Adjusted return is measured by Sharpe Ratio which is equal to the asset class excess return over
the current repo rate divided by the annualized standard deviation.
6.3 Index vs Portfolio constituents (clause 4.7 of the investment policy)
The Manager will continue to invest in all the constituents of the J251 Index however, the
CoreShares PrefTrax ETF will proportionally invest into cash to alleviate the liquidity concerns
as constituent preference shares redeem.
7. RISK CONSIDERATIONS
The Manager considered the following risks in continuing with providing the CoreShares PrefTrax
ETF by way of an exemption/suspension.
7.1 Liquidity risk
Based on our liquidity analysis, without the bank issuances there is insufficient liquidity to run
an ETF within the asset class. This is a function of the structurally small preference share
universe available without the banks’ issuances wherein only five preference share
instruments would qualify under the existing criteria. These five make up approximately 19%
of the existing Index and a smaller portion of the liquidity. This represents both concentration
and liquidity risk to clients.
7.2 Tracking error risk
The Manager believes that the risk of continuing to acquire illiquid preference share securities
is greater than that of the tracking error risk due to the cash holding proposed. Accordingly,
our primary focus is on liquidity risk.
7.3 Return and risk impact on investors
Given the differing risk and return profiles of preference shares and cash there will be an impact
on the risk and return characterises of the CoreShares PrefTrax ETF. Historically preference
shares have produced higher levels of annualised return (1) than cash with additional volatility
(2). Based on historic experience a stepped proportionate investment in cash assets will lower
return expectation, improve risk as measured by volatility and improve risk adjusted return as
measured by the Sharpe ratio (3).
The table below illustrates the historic returns of a portfolio invested 100% in preference shares
and then the corresponding portfolios stepped in 20% increments to 100% cash (1). This table if
for illustrative purposes only and is based off historic return and risk statists so is by no means
an indication of future returns. Past performance is not indicative of future performance.
Hypothetical ETF scenarios: Preference Shares and Cash
80% 60% 40% 20%
100%
Preference Preference Preference Preference 100%
Preference
Shares Shares Shares Shares Cash
Shares
20% Cash 40% Cash 60% Cash 80% Cash
Annualized Return (1) 9.4% 8.7% 8.1% 7.4% 6.8% 6.1%
Annualized Volatility (2) 15.6% 12.5% 9.4% 6.2% 3.1% 0.1%
Risk Adjusted Return (3) 0.25 0.26 0.27 0.31 0.40 NA
1. Past performance is not indicative of future performance, The above table illustrates the average
annualized performance of the FTSE/JSE J251 Preference Shares TR Index and the STEFI
Composite TR Index over a period of 10 years ended 31 July 2022.
2. Volatility is measured by three years standard deviation.
3. Risk Adjusted return is measure by Sharpe Ratio which is equal to the asset class exec return over
the current repo rate divided by the annualized standard deviation.
Investors are invited to direct any queries to invest@coreshares.co.za. Further information regarding
the temporary suspension and future re-mandate the fund will be communicated to investors in due
course.
5 September 2022
Sponsor
Grindrod Bank Limited
Date: 05-09-2022 02:45:00
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