Old Mutual ETF folds after key stocks migrate to VFEX

Business Writer

The Old Mutual ZSE Top 10 Exchange Traded Fund (ETF), launched with the aim of simplifying investment in Zimbabwe’s top companies, is shutting down after key holdings migrated to a separate US dollar denominated bourse, the Victoria Falls Stock Exchange (VFEX).

The ETF, which debuted on the ZSE in January 2021, tracked the performance of the ZSE’s ten largest companies by market capitalisation. However, several of these companies, including heavyweight names like Innscor Africa and National Foods, have since moved their listings to the VFEX.

This migration disrupted the core purpose of the Old Mutual ETF, according to Old Mutual Investment Group Zimbabwe.

In a circular to unitholders (ETF investors), Marjorie Mayida, the managing director, explained: “The current composition of the underlying index has made it difficult to replicate the Index and thus increasing the tracking error.”

Tracking error refers to the difference between the performance of an ETF and the underlying index it seeks to mimic.

With key holdings no longer on the ZSE, the Old Mutual ETF could no longer accurately reflect the performance of the ZSE’s top companies.

The resulting tracking error, a measure of how closely an investment fund’s performance aligns with its benchmark index, had become too significant to ignore, Mayida said.

Further compounding the issue was thin trading of the ETF itself.

Low trading volume meant the ETF was not a very liquid investment, making it difficult for investors to buy or sell units (shares) quickly.

Unwinding the ETF

To preserve value for unitholders, the managers have proposed terminating the listing of the Old Mutual ZSE Top 10 ETF and subsequently unwinding the fund. This essentially means selling off the ETF’s holdings and distributing the proceeds to investors.

Unitholders with over 1 million units will receive their share of the ETF’s assets in the form of stocks (scrip) of the underlying companies.

Smaller investors will receive cash proceeds. There may be additional costs associated with transferring these shares or receiving cash.

While this decision may have financial implications for unitholders, the managers have assured investors that they will prioritise their interests and adhere to all regulatory requirements.

Unitholders are advised to consult with financial advisors to fully understand the potential impact of the ETF’s termination on their portfolios.

The demise of the Old Mutual ZSE Top 10 ETF underscores the challenges faced by the Zimbabwe Stock Exchange.

Walter Mandeya of Trigrams Investment said the migration of major companies to the VFEX has significantly reduced liquidity and investment opportunities on the ZSE.

“As the market continues to evolve, it remains to be seen how the ZSE will adapt to these changing dynamics,” said Mandeya.

Meanwhile, the managers have assured investors that they will comply with all regulations and prioritise investor protection throughout the termination process. They recommend that unitholders seek professional financial advice to understand the full implications of the ETF’s closure.