Questions raised over use of Alsi as benchmark

Some South African equities fund managers still use the JSE’s all-share index (Alsi) as a performance benchmark for their portfolios, although only six companies account for nearly half of its market capitalisation.

At R4.6-trillion, tobacco manufacturer British American, miners BHP and Glencore, media conglomerate Naspers, luxury goods company Richemont and retailer Steinhoff accounted for 44% of the index’s value on Wednesday versus 47% in the previous year.

As these companies are seen as rand hedges due to either being foreign companies or because of their exposure to offshore markets, questions have been raised about the index’s use as a benchmark for equity portfolios that have the majority of their holdings in companies without similar offshore exposure — and charging fees of up to 20% for beating the benchmark.

“It is a bit questionable whether the JSE Alsi as well as the JSE Swix [shareholder-weighted index] are appropriate benchmarks to use as a tool to measure your portfolio risk against, as Naspers has a more than 20% weighting in these indices,” said Adrian Cloete, portfolio manager at PSG Wealth.

“In my personal view, it is very risky to have a 20% exposure to a single counter — Naspers — in a client portfolio.”

Bradley Preston, chief investment officer at Mergence Investment Managers, said some funds used the Alsi because it was the oldest benchmark.

Patrice Rassou, head of equities at Sanlam Investments, agreed, saying “these are old funds, so [it] would be per their original mandates”.

There could also be resistance from passive investors.

“The Alsi, as opposed to the Swix or [capped index] is a simpler benchmark, being just a pure capitalisation-weighted index, and thus represents the simplest active equity index,” Preston said. “Making the decision to use a shareholderweighted or capped index adds an additional decision, which could be seen as an active decision, and some investors may want to avoid this.”

Many South African institutions also faced restrictions in their offshore exposure and may use the Alsi — with its rand hedges — to get around this.