ZAR X makes a foray into the unit trust industry
The slow pace of initial public offerings is forcing ZAR X into new growth areas.
There are currently some 1,600 registered unit trusts on offer in South Africa, with more than R1.9 trillion invested in them. The proliferation of technology means that individual investors can buy and sell a wide selection of shares or structured unit trust products.
But in South Africa, the investment community hasn’t adopted technology at a fast rate or exposed investors to a large universe of investment products online. Although some unit trust portals are offered by local asset managers, the selection of funds they offer is limited.
Alternative stock exchange ZAR X is hoping to change this. It recently announced that it intends to use blockchain technology to launch a platform that will allow members of the public to directly buy and sell a wide range of funds.
The platform, which will be available on the ZAR X mobile app before the end of the year, will work in much the same way that online share trading does – with real-time data on fund managers, fund fact sheets, fees, and historical returns might be included.
Etienne Nel (pictured), CEO of ZAR X, spoke to M&A Africa about its move towards the unit trust industry.
M&A Africa: Why is ZAR X moving towards the unit trust industry?
Etienne: It is one of the things that ZAR X does and we always ask the question; why can’t we list unit trusts on an exchange and why it has not been done before? We looked at it and said there is no place where, firstly, the average man on the street can look at unit trust pricing across multiple asset managers.
You can go to the likes of a Linked Investment Service Provider (a company that offers investors access to collective investment schemes or unit trusts across a number of different management companies) and they might have a selection of asset managers. But because we are an exchange, we can approach all of the asset managers and ask them if they are open to having an exchange or platform with listed unit trusts.
M&A Africa: And how has the response been so far from asset managers?
Etienne: The response has been overwhelmingly positive because ZAR X would be another distribution mechanism for unit trust providers. From an exchange perspective, we are now able to quote additional investment products for the average man on the street. Because we are in a fintech (financial technology) environment, we can make these investments and cost-effectively distribute investment products and there is no minimum investment. A lot of unit trust providers have a minimum investment of R500 to R1,000. It is a function of them having very manual and paper-based administrative processes to sign up for unit trusts, which is not the case with ZAR X.
M&A Africa: Is the new unit trust offering similar to your securities offering that is premised on real-time data? In the case of unit trusts it would be having data such as the fund manager, fact sheet and historical returns available in real-time.
Etienne: We can do real-time data but the industry isn’t right now. We took a conscious decision to plug into existing industry infrastructure to make onboarding easier. We think we should be able to offer real-time data given the available technology. Let’s call this phase two. Phase one is about starting to get people used to being able to buy and sell unit trusts, for example, on the ZAR X mobile app. When we go live in the next month and a bit, you will be able to buy a selection of unit trusts on the ZAR X phone app, which we think is a game-changer because people are now filing forms and faxing it to their service providers to buy unit trusts. We can digitise it and we have the platform to do it. We think it is a compelling distribution mechanism.
M&A Africa: There are about 1,600 locally registered unit trusts in South Africa. How many trusts are you targeting?
Etienne: We won’t be listing all of them. If we do this, we will end up with ‘a kid in a candy store syndrome’. People will be completely blinded with choices. Some of the bigger fund managers we are talking to are saying they want to list between five to 20 of their specialist funds. We won’t be listing all of them but there will be significant choices for investors.
M&A Africa: And what will the cost be for investors to buy and sell unit trusts? What fee structure are you looking at?
Etienne: In the ZAR X environment, our model is largely unchanged. To get and hold a ZAR X account is free. As a principle, we like to be transparent regarding fees.
The engagement we are having with the asset management industry is that we have to issue what they call an institutional class of share, which refers to the lowest cost of investment products and that differs from one fund manager to the next. Currently, fees are not transparent. When you buy a unit trust, you are buying a long-term investment. If we can make the transactional fee low, then it will be cost-effective. To the extent that you hold the fund that you’ve bought on ZAR X market for five years, your transaction fee becomes academic because it is free to get and free to hold. There is no ongoing fee to have the account and that to us is significant.
M&A Africa: How are you finding the securities listing market considering the tough economic environment in South Africa?
Etienne: The economy is tough and what is happening is that investors are sitting on their hands. We’ve had a number of companies talk to us about listing, but it is sort of a wait-and-see approach until the economy improves.
We, as a start-up, had to be agile in our approach to business and we looked at other things we could list. We partnered recently with Uprise. Africa, a crowdfunding platform, which got us exposure in the crowdfunding space. We are in discussions with some of their clients/companies there to list on ZAR X. And then we are focusing on unit trusts. We are working on another couple of listings hopefully they would come to the exchange before the end of the year.