Publications
Partners
In a previous Fin24 Money Clinic question a Fin24 user, who had invested R1 000 in Satrix 40 five years ago, wanted to know if it is worth keeping it there and adding R200 per month by debit order to increase the savings.
To this Daryl Ducasse of Mekurius Capital Solutions, responded that he thinks the Fin24 user is doing the right thing by topping up on an investment that may already be performing.
He added that the user should just be careful about the costs - "that is, make sure the average weighted cost does not exceed the net asset value too much".
After publication, another Fin24 user wrote to ask for an explanation in non-financial layman's terms what is meant by “make sure the average weighted cost does not exceed the net asset value too much". He wrote:
Maybe an example of such a cost calculation could help me. My current Satrix investment is about R200 000 and I’m adding R5 000 a month.
Ducasse responds:
In your instance, you have committed to a substantial monthly investment amount.
Regarding the previous reader's question: "I invested R1000.00 five years ago and I want to know if it is worth keeping it there at Satrix 40. Can I add R200.00 per month as debit order to increase the savings?”
The debit order fee alone is R3.50 – this represents 1.75% of his monthly contribution.
In addition to this, there are brokerage fees, which amount to 0.10% per transaction, an administration fee of 0.10% to 0.70% per annum and, in addition to those fees, there are the Strate and investor protection levies and VAT.
Although all investments have VAT, entry, exit and administration/management fees, those fees need to be considered in relation to the actual investment being made – it is a cost against the investment.
Therefore, the R200 is no longer R200 but less than R200. The previous Fin24 user's return is therefore no longer calculated on his R200, but on the lesser amount.
However, in your case, although you will still be paying the same fees, the ratio has less of a dilutionary effect on the return: R5 000 : R3.50 = +0.07% as opposed to +1.75%.
Therefore, the weighted average entry cost for you, in relation to your capital balance, becomes negligible.
In effect, the previous Fin24 user is worse off than you in relative terms and it would take him or her longer to achieve the level of return that you may enjoy, simply due to the fact that there is proportionately less cash out of the investment to work with.
Reinvesting those returns, or capitalising the dividends would help achieve a compounded effect, but not all investors are disciplined enough to do that.
Satrix was supposed to put a basket of high divvie opportunities – it seems that those returns are not bleeding their way down to the investors.
I know that making an investment decision based merely on return is not wise.
My question is really whether the opportunity is entirely beneficial for the investor, or whether the benefits are weighted heavily in favour of the manager?
In times of uncertainty and volatility, cash (flow) is king. I would rather have a higher return, security of capital and the foreknowledge that I could access that capital at a particular fixed date, rather than see a graph that appears to be heading on a stratospheric path.
This only means that the marketers are doing their job well and demand is growing (pricing is relative to supply and demand?).
If you got in early, and are exiting at the top, great, but if coming in at the top where this is, the entry cost per unit becomes expensive. Why not just access the actual shares?
I understand that many people are not active investors and that there is a market for monthly investment products for passive investors. It’s just that there’s no difference between the risk in the direct equity now, and the Satrix instruments.
So, in short, what is the overall cost per unit and how does an investor's capital exposure compare to the underlying net asset value of the instrument, in my view.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
