Investing in ETFs has never been easier, more cost-effective, and less risky. To give an example of this, we decided to bring you an overview of the SBITOP index (for which there’s an ETF available, 7SLO ETF) compared to investing in individual stocks in the index.
With the stellar performance of the Slovenian capital market in 2021, looking at how well the SBITOP performed compared to its individual constituents is worth it, not only from the returns perspective, but also from the risk, and cost perspective. In 2021, SBITOP index had a return of 39.8%. Of the 9 constituents of the index, 8 had a positive double-digit return, while 1 had a negative return. Ouf of these, 4 (NLB, Petrol, Sava Re, Cinkarna Celje) had returns higher than the index itself, at 66.4%, 56.3%, 50.8%, and 45.5%, respectively. At the same time, out of the remaining 5 companies, 4 of them (Luka Koper, Krka, Telekom Slovenije, and Triglav), yielded returns of higher than 20%, at 32.6%, 29.1%, 28.9%, and 22.6%, respectively, while KD Group was the only one to experience a decrease ( -19.3%).
SBITOP vs. SBITOP constituents performance in 2021 (%)
However, this is only one part of the story. Even though some of these companies had really strong returns in the year, one should also take a look at how many days did they actually outperform/underperform compared to the index. Here we can see a different story. None of the companies actually outperformed the index when the total number of days is looked at, with the highest return stock (NLB) outperforming the index exactly half (50%) of the days. At the same time, the only negative return stock (KD Group) outperformed the index by only 40.9% of the days. For the vast majority of the remaining days, however, these companies underperformed the index. So what does this tell us? Two things. First of all, 2021 was a stellar year for the Slovenian capital market, in terms of returns, but only on the days, these individual companies outperformed the index. This means that secondly, investing in the SBITOP index could be as effective as investing in individual stocks if one wanted to invest over a longer period of time. This also supports the fact that as individual investors, it is really hard (almost impossible) to „time“ the market really well for a prolonged period of time.
Performance in terms of days SBITOP vs. SBITOP constituents in 2021 (%)
*Companies’ numbers will not add up to 100%, due to there being days where companies performed the same as the index
One has to be very knowledgeable (or lucky) to find a really good company that can consistently give good returns, or rather, better returns than a whole index. And then one would still have to bear company-specific risk. At the same time, if we were to invest in a couple of stocks instead of one, and thus „diversify the risk“ but choose not to invest in an index (which would do this for us), you would still be bearing a specific risk of these few companies. This is where CAPM (Capital Asset Pricing Model) shows its usefulness, and you can look for a beta of each individual stock to see how much risk this investment would add to a portfolio that looks like the market. If a stock is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio. Adding beta to the formula assumes that risk can be measured by a stock’s price volatility, but in fact price movements in both directions are not equally risky. Beta does not account for the relative riskiness of a stock that is more volatile than the market with a high frequency of downside shocks compared to another stock with an equally high beta that does not experience the same kind of price movements to the downside. All of this should be taken into account when building a portfolio.
So if one would be willing to make their own portfolio, one would also have higher inherent costs to each transaction (such as broker fees, custody fees, dividend taxes if the stocks have dividends, among others). Even though this can yield good results for some of the time, it does not take into account one other cost: the capital gains tax. This tax refers to the 10% tax (and the city surtax charged on this 10% depending on where you live) for any investment that’s cashed out within 2 years period after it was made. But one might say that this tax is charged on all capital gains, SBITOP included. Well here we come to the crux of the issue: Since individual stocks have higher risks (but also higher returns) one might be tempted to “cash-out” earlier if something goes wrong with a stock they have a position in, having to pay the capital gains tax. Owning a diversified index like SBITOP can lower that temptation (and also the risk), which means that in the long-term, it would yield higher returns. Considering the fact that we have a positive outlook on the Slovenian capital market for 2022 (good dividend yields, returns, higher liquidity, etc.), investing in a benchmark of the market (SBITOP index) can be a good idea.
Of course, you could say that investing in index funds has been available for a long time now, so what’s the point? Well, you have to take into account that index funds are actively managed by fund managers, meaning that even if we would select an index fund over one or several stocks (and get all the benefits we mentioned above), one would still have to pay some fund-specific fees (depending on the fund, like entry fees, exit fees, management fees etc.) This fees all add up, while exit fees are usually wiaved by the fund if investor stays in the fund for more than two years.
This is where an ETF like the 7SLO comes in handy. Since it is a passively managed fund (only following the underlying assets of the SBITOP index in the percentage they are present in the index), the inherent costs are lower. At the same time, since it’s a composite of stocks, it diversifies the risks. Lastly, the 7SLO ETF is based on the total return policy. This means that any dividends that are paid out by the companies which compose the Index are directly reinvested. This creates even higher returns and avoids the dividend tax if one were to own these stocks individually, even in the same weight as the SBITOP index. All of this means that an ETF like the 7SLO can give you the best of all worlds. In 2021 7SLO combined it all: good returns and dividend yields of Slovenian companies, lower risk through diversification, lower overall costs, and a chance to invest long-term, without a hassle. To learn more about the 7SLO ETF, click here.
For today, we decided to present you with a YTD performance of Croatian and Slovenian Blue-Chip Companies.
As visible from the graph, among the CROBEX10 companies, only 2 out of 10 are in green on a YTD basis. To be specific, Podravka leads the list with a YTD increase of 5.5% with Valamar Riviera following the list with an increase of 1.8%. On the flip side, AD Plastik reported the highest YTD decrease amounting to -5.4%, followed by Arena Hospitality Group and Končar, both amounting to -3.2% YTD.
Podravka’s share has in this year continued its strong performance from 2021, when it was up 30% YoY. The company announced last week that its Supervisory Board has confirmed its five people Management Board for a five-year term and Ms. Dalić will continue to lead the Board. Last year in June the company has announced main guidelines of its strategy until 2025 while in December it announced their 3 -year business plan outlines. Podravka’s management decided in its long-term strategy to keep investing in the business to achieve operating efficiencies. Introduction of new logistic distribution centre, that will be located in close vicinity of their production facilities, is one of them. It will start operating from 2024 and it will ensure that company improves its profitability. Podravka has been deleveraging their operations for several year now, which led to the company recording their lowest level of indebtedness and at 9M 2021 it net debt stood at HRK 450m. Strong balance sheet has supported it through times of pandemic, while it can also gives the company potential to choose when deciding on an M&A target. In order to reach 3x EBITDA Podravka Group could take on almost HRK 1.4bn of additional debt. Translated in EUR this comes to more than EUR 183m. If Podravka would take over another company that is not leveraged up to it full potential, this amount could even be higher.
When we look at AD Plastik, we can say that its price has still been under pressure due to semi-conductor chip shortage and its influence on automobile industry. Original Car Manufacturers, the main clients of AD Plastik, are still not significantly increasing the volumes of spare parts from their suppliers due to delays in the production of finished products. Demand for semi-conductor products will continue, so the supply chain is likely to remain very tight well into 2022. As a reminder, AD Plastik’s quarterly revenue in 2021 Q3 was down 29% YoY. Revenue of Ad Plastik is also expected to follow this pattern and slow recovery is expected to start in the following quarters. Increased semiconductor capacity from all the equipment installed will give rise to a semiconductor overcapacity in 2023, when further rebound of AD Plastik revenues is expected. Albeit still not back to 2019 level, when their revenue reached HRK 1.5bn.
YTD Performance of Croatian Companies
In Slovenia, most blue chips noted a YTD increase, with Petrol leading the list (+4.6% YTD). Cinkarna Celje, Telekom Slovenije, Triglav and Luka Koper follow the list with an increase of 4.2%, 3.2%, 2.4% and 1.6%, respectively. Meanwhile, NLB noted a 1.7% YTD decrease, while Krka noted a 1.8% YTD decrease.
NLB share came under pressure last week as Slovenia passed the CHF loans law requiring all banks to reimburse their customers for interest paid above FX cap that is set at 10% on the exchange rate between Swiss francs and the Euro rate, for all the loans taken in the period from 2004 to 2010. Banks will file an initiative with the Slovenian Constitutional Court to initiate proceedings to assess the constitutionality of the law and a proposal to suspend enforcement. They will also ask for suspension of the application of the law until the review of its constitutionality will be know. NLB Group has last week published the announcement on LJSE where it estimates potential negative pre-tax effect of EUR 70m-75m if the suspension of the law could not be achieved. To put things into a perspective, this accounts for broadly speaking a quarterly EBT of the Group. More on this topic you can read here.
YTD Performance of Slovenian Companies
During the entire 2021, GWPs had an increase of 1.8% YoY, Non-life insurance grew by 2.8% YoY, while Life insurance decreased by -0.6% YoY.
The Slovenian Insurance Association published its monthly report on the movements in the Slovenian insurance sector. During the entire 2021, GWPs increased by 1.8% YoY, reaching EUR 2.62bn by the end of the year. Non-life insurance grew by 2.8% YoY, amounting to EUR 1.87bn, while Life insurance decreased by -0.6% YoY, amounting to EUR 746.9m.
Non-life insurance, which equals 71.45% of total GWPs, had a strong performance in Other damage to property insurance, which grew by EUR 28.12m (or 18.56%) YoY, and Land motor vehicles insurance, which increased by EUR 18.4m (or 5.75%) YoY. On the flip side, Health insurance decreased by EUR 9.89m (or -1.51%) YoY, while Motor vehicle liability insurance also declined by EUR 6.11m (or -2.24%) YoY. Considering all these insurances account for 9.6%, 18.07%, 34.54% and 14.28% of Non-life GWPs (combined 76.5%), these changes are significant. It should also be noted that the 5th largest insurance type in the Non-life insurance (Fire and natural forces insurance) increased by EUR 6.34m (or 4.77%) YoY.
On the other hand, the Life insurance sector, which equals the remaining 28.55% of the total GWPs, experienced a decrease of -0.55%. Inside the segment, Life assurance decreased by EUR 14.49m (or -4.72%) YoY, while at the same time, Unit-linked life insurance grew by EUR 26.39m (or 16.25%) YoY. Supplementary pension insurance according to the pension and disability insurance act decreased by 11.69%, while Marriage assurance, birth assurance decreased by 15.69%.
On an MoM basis, total GWPs increased by EUR 192.6m (or 7.9%), Non-life insurance grew by EUR 120.7m (or 6.9%), while Life insurance grew by EUR 71.9m (or 10.6%).
Performance of the Slovenian Insurance Sector in 2021 ( YoY, EUR)