Since its launch at the end of April, banker Absa has experienced strong and consistent demand from institutional investors with regard to its NewPlat exchange-traded fund (ETF).

“The NewPlat ETF has more than $800-mil- lion in assets and is supported by more than 17.5 t of platinum bullion, making it the second-largest platinum ETF globally,” Absa Corporate and Investment Banking division head Dr Vladimir Nedeljkovic tells Mining Weekly.

The NewPlat ETF is issued by NewGold Issuer, which is also the issuer of Absa’s similar NewGold ETF, in the form of NewPlat platinum bullion debentures.

These debentures are listed on the main board of the JSE in rands, providing investors with an opportunity to be exposed to the rand price of platinum.

Although predominantly sold to South African investors, either through a registered member of the JSE or through an investment plan specially structured for the investor, international investors can also invest in the NewPlat ETF through a South African-registered investment dealer or stockbroker in the same way they would invest in shares.

NewPlat enables investors to directly invest in actual platinum bullion, as its securities are structured as debentures and supported by physical platinum, with each debenture representing about 1/100th of an ounce of platinum.

The price is calculated by taking the dollar price of 1/100th of an ounce of platinum and multiplying it by the rand:dollar exchange rate and by the allocation factor. This factor is published daily by the Issuer and takes into account the 0.4%-a-year accumulated fund: expense ratio.

Nedeljkovic explains that, while investors would normally realise their investment in the secondary market, holders of NewPlat debentures who have a permit to hold platinum bullion can exchange a block, which is equivalent to about 400 000 or more NewPlat debentures, for the physical platinum bullion. The bullion is stored at NewGold Issuer’s custodian, Barclays, in London.

“Prior to the listing of NewPlat, the only way for South African investors to access platinum was through exchange-traded notes (ETNs) or by proxy through platinum equities,” notes Nedeljkovic.
He adds that the listing of NewPlat ETFs is a way for investors to diversify their commodity exposure away from platinum equities to the metal itself.

Further, NewPlat ETFs also give investors the opportunity to invest in platinum as a domestic asset, as platinum ETNs are treated as foreign exposure, thus forming part of the offshore allowance for institutional investors.

Nedeljkovic highlights that investors need to take the situation in the South African mining environment, and the effect it has had on the supply of the metal into consideration when investing in platinum-linked securities, such as NewPlat.
An additional factor that needs to be taken into consideration is that investment in platinum ETFs, such as NewPlat, represents an additional source of demand for the metal, which could further positively affect the price of the metal.

Nedeljkovic says there are several reasons why NewPlat has been such a success with South African institutional investors.
Firstly, South Africa is the largest producer of platinum in the world, which means that the country’s analysts and investors have significant experience in analysing and investing in platinum miners.

The NewPlat ETF gives investors an opportunity to invest directly in the metal, thus disaggregating the platinum price risk from idiosyncratic corporate risks, such as labour issues and production costs, among others.
Secondly, South African prudential rules limit exposures to foreign investments for South African institutional investors.

“As NewPlat and NewGold are allowed to use only metals of South African origin as the underlying investment, they are treated as domestic investments and are, therefore, more attractive to South African institutions, compared with, for example, ETNs or foreign commodity ETFs,” highlights Nedeljkovic.
“Lastly, in South Africa, ETFs have to be fully ringfenced and supported by a physical commodity, such as actual platinum bullion, which eliminates any credit risk on the originator. This is also in contrast to ETNs, where investors bear the full credit risk on the issuer,” he says.

There are potential risks associated with ETFs, such as that they should not be consid- ered as short-term investments, as they oper-ate on the principle that, tracking specific markets, indices or commodities in the medium to long term offers better after-cost returns than traditional actively managed funds.

The value of an investment in an ETF may increase or decrease as the market, or the index that the ETF is tracking, changes.

Further, ETFs are not capital protected and investors may not, therefore, receive the same returns as the amount invested.

ETFs also have other investment-embedded risks, such as general market, interest rate and exchange rate risks, as well as inflationary, liquidity, legal and regulatory risks.

Despite this, NewGold and NewPlat ETFs, with their low free structure, offer a market-related performance or return, as they are based on physical bullion, and are also easy to trade on the JSE and track on the Absa Capital website.
Investors are advised to buy NewGold platinum debentures, as platinum has a low to negative correlation with other asset classes, making it an excellent portfolio diversifier.

Platinum also provides long-term invest-ment stability, as it is rarer than gold or silver, and the demand for platinum seems unlikely to deteriorate, owing to the scarcity of the metal and its use in industrial applications and jewellery making.