By ETimes
HARARE – The decision to terminate the listing and unwind the Old Mutual ZSE Top Ten Exchange Traded Fund (OM ZSE TT ETF) signals a significant moment for Zimbabwe’s financial markets. While the fund’s managers cite structural challenges and diminished performance as justification, the situation reflects broader issues in the country’s economic and market environment.
Upon dissolution, assets will be distributed based on unitholders’ holdings: those with less than 1 million units will receive cash proceeds, while those holding 1 million or more units will receive shares of the underlying stocks (scrip). An Extraordinary General Meeting (EGM) is scheduled for December 12, 2024, to vote on these proposals. Approval requires a 75% majority vote from participating unitholders.
The final trading day for the ETF is set for December 10, 2024, after which the fund’s valuation will be finalized, and asset distribution will take place. This circular serves as a call to action for unitholders to review the proposals thoroughly and actively participate in the EGM decision-making process.
Performance Challenges and Rationale for Termination
At its inception in 2021, the OM ZSE TT ETF aimed to provide a simplified investment vehicle tracking the top ten companies on the Zimbabwe Stock Exchange (ZSE). However, the ETF struggled due to significant structural shifts, including the migration of key stocks to VFEX.
Counters like Innscor, Simbisa, and Padenga, pivotal to the ETF’s strategy, delisted from the ZSE and migrated to the VFEX. This disrupted the fund’s ability to replicate the index and increased its tracking error.
Accordingly, there is declining liquidity. The ETF faced thin trading volumes, further exacerbating the challenges of delivering its promise of diversification and convenience for investors.
These factors eroded the ETF’s ability to meet its objectives of tracking high-quality, high-dividend-yielding stocks, leading to the managers proposing its unwinding.
The blue line indicates the fund’s net assets (inflation-adjusted in ZWL billions), showing overall value. The orange dashed line marks average daily trading volume as a percentage of units issued, illustrating declining liquidity.
ETF Financial Performance: A Closer Look
The financial performance of the ETF offers critical insights into its viability:
Net Asset Value (NAV) Trends: As of December 2023, the ETF’s total net assets stood at ZWL7.76 billion (inflation-adjusted), up from ZWL 5.49 billion in December 2022. While this growth reflects rising equity values, much of it is likely driven by inflationary pressures rather than genuine performance.
Trading Activity
The ETF experienced low average daily trading volumes of just 0.016% of units issued in 2024, underscoring its lack of liquidity and limited investor engagement.
Returns for Investors
The fund’s returns have been volatile, reflecting fluctuations in the underlying market and the impact of economic instability. The ETF recorded a significant net income of ZWL 2.49 billion in 2023 (inflation-adjusted) after a staggering loss of ZWL 6.26 billion in 2022. Such volatility diminishes its attractiveness as a stable investment vehicle.
Currency Risks
The dual-currency nature of distributions (ZWL for ZSE stocks and USD for VFEX stocks) complicates the valuation process and exposes investors to currency risks.
What are the critical concerns?
Structural Weakness of the ZSE
The ETF’s struggles highlight deeper issues within the ZSE, including limited market depth and the migration of blue-chip stocks to the VFEX. Without a stable and diversified index, ETFs tied to the ZSE face inherent challenges.
In terms of investor costs, the termination process entails liquidation costs, regulatory levies, and taxes, which will reduce the net proceeds available to unitholders. This raises questions about whether investors will realize meaningful value from their holdings.
Limited investor participation is another issue of concern. Only 15 investors hold more than 1 million units, accounting for 86% of the ETF’s issued units. This concentrated ownership diminishes the ETF’s appeal as a broad-based retail investment product.
The regulatory environment has not kept pace with market dynamics. The lack of measures to retain key counters on the ZSE or mitigate the impact of migrations to VFEX has directly undermined the ETF’s objectives.
Lessons for the Future
The OM ZSE TT ETF’s unwinding offers critical lessons for Zimbabwe’s financial markets. This calls for strengthening market fundamentals with policies to retain blue-chip companies on the ZSE and attract new listings that are essential to building robust indices for ETF products.
Future ETFs must consider flexible strategies that account for shifts in market composition, including multi-exchange tracking or sector-specific focuses. Ensuring that retail investors fully understand the risks of ETFs and providing clear, cost-effective exit mechanisms during liquidation is crucial to maintaining trust in similar products.
Our thoughts
The termination of the OM ZSE TT ETF reflects the intersection of market inefficiencies, economic instability, and poor strategic adaptability. While the fund managers’ decision is pragmatic under the circumstances, it highlights the need for systemic reforms to Zimbabwe’s capital markets. For investors, this development serves as a cautionary tale about the importance of liquidity, market stability, and regulatory foresight in financial product success. Future ETF products must be designed with resilience and adaptability to navigate the challenges of a volatile and evolving market.