Lotus Halal Traded Fund, Expanding Frontiers Of Capital Market

Lotus Capital Limited, a pioneer and household name in ethical fund management in Nigeria, recently launched the first sharia compliant exchange traded fund in sub-Saharan Africa – the Lotus Halal Equity Exchange Traded Fund (“LHE ETF”), with a target of raising about N1.5 billion during the initial offer period. The offer opened August 15, 2014, and closes September 11, 2014. Subscription is at an indicative unit price approximately equal to 1/200th of the value of the NSE-Lotus Islamic Index (“NSE LII”) on the day preceding the subscription.

The LHE ETF would be listed and traded on the Nigerian Stock Exchange (NSE) and will contribute to overall market capitalisation and the global exchange traded fund universe.

ETFs are dynamic instruments usually designed to track different types of indexes such as equities index, bond index or commodity index. The indexes can be sector specific such as those limited to oil and gas companies, construction companies, banks, financial services, or commodities such as precious metals, and export crops, among others. Some indexes may also be thematic, such as the NSE-LII which tracks the performance of sharia complaint stocks listed on the NSE. Some indexes are jurisdiction specific i.ethey track the performance of major stocks in particular jurisdictions, such as the HSBC Frontier Markets ETF tracking Nigerian and Kenyan stocks. Thus, by buying into any ETF created around these indexes, investors are able to obtain market exposure into the underlying universe of securities tracked by the index.

Exchange traded funds (ETFs) are a relatively new asset class in the Nigerian capital market. As of today, there are only two ETFs listed in Nigeria – the New Gold ETF and the Vetiva Griffin 30 ETF. The New Gold ETF is sponsored by ABSA Capital in conjunction with Vetiva Capital Management Ltd. The ETF continuously tracks the spot price of gold in the South African market. The Vetiva Griffin 30 ETF is sponsored by Vetiva Capital Management Ltd and it tracks the NSE 30 index (a basket of the 30 most highly capitalised and liquid stocks on the NSE).

The LHE ETF is designed as an open ended fund intended to track the yield and performance of the NSE-LII. The NSE LII was initially developed by Lotus Capital Ltd in 2009, and publicly launched in conjunction with the NSE in 2012 to track the performance of shari’ah compliant stocks on the NSE.

The underlying stocks in the NSELII undergo what is known as Shari’ah or Islamic screening by the Fund Manager, Lotus Capital, before inclusion in the index. There are two levels of screening – qualitative and quantitative screening. The qualitative screening eliminates unethical sub sectors or sub sectors which are not permissible under Islamic law such as companies dealing in alcoholic beverages, tobacco, conventional financial services, gambling and adult entertainment. The second stage which is the qualitative screening employs the use of financial ratios and factors to eliminate listed companies with unacceptable levels of debt, cash and interest income. The market capitalisation and liquidity of the stocks are also an important consideration in placing them in the index. The NSE LII is rebased semi-annually to ensure all stocks continually meet the set criteria.

This rigorous process of selection enables the Fund Manager to track the stocks with utmost value. The NSE-LII was designed to assist investors particularly retail investors seeking exposure to sharia compliant equities on the NSE in making easy investment decision that does not compromise their value. Thus, by going through the constituent stocks of the NSE-LII, they are able to choose the stocks to invest in.

As noted previously, there are only two ETFs currently listed on the NSE namely the NEWGOLD ETF which tracks track the price of Gold Fix PM on the London Stock Exchange(“LSE”) and Vetiva Griffin 30 ETF, which tracks the NSE 30 index (a basket of the 30 most highly capitalised and liquid stocks on the NSE). Since inception, The VG30, alongside the index tracked (i.e NSE30)has outperformed the NSEAll Share Index with a year to date currently at 10.06 percent (vs NSEASI 7.95%).

The LHE ETF will offer investors competitive yields, as the constituent securities in the underlying index are fundamentally sound, consisting of companies like Dangote Cement plc, which contributes 20% to market capitalisation, WAPCO(1.82%) and Nestle (4%).

In terms of liquidity, the LHE ETF will be listed and actively traded on the NSE. In addition, Vetiva Securities Limited, the ETF’s Authorised Dealer will provide liquidity by continuously providing two-way quotes for the LHE ETF on the floor of the NSE. In this way, the Authorised Dealer will be available to buy the units of any holder at any time.

Investing in the ETF reduces the cost and time required by an investor to independently create an equity portfolio. This is an important advantage of investing in the LHE ETF particularly for retail investor. Thus, the LHE ETF Securities will confer on the unit holder of one security a proportionate share in the economic benefits of all the securities issued by the constituent companies comprising the NSE-LII. This also provides an important asset allocation and cash management tools for institutional investors.

The LHE ETF should also provide lower transaction cost in terms of management fees compared to an active mutual fund and also afford the Fund Manager opportunity to negotiate lower transaction cost usually associated with stock transfers.

With the launch of the Lotus Halal Equity ETF, institutional investors such as pension fund administrators, fund/portfolio/asset managers, trustee, brokers, insurance companies e.t.c. would have a broader asset class and investment outlet. It is represent an attractive value proposition to foreign investors particularly fund/portfolio managers seeking exposure to the Nigerian equities market. In addition, the LHE ETF would provide a new asset class for ethical funds who hitherto have limited instruments to invest in.

A key consideration in equity investments is the need to manage the volatility inherent in the capital market. As a unit of the ETF represents a portfolio of fundamentally sound, diverse and lower-correlated stocks, the volatility of the ETF is therefore, lower than that of a single stock and indeed the market as a whole.

Originally published on www.businessdayonline.com