Changing for the better?
The JSE has proposed several changes regarding how indices are constructed, the introduction of a new Top100 index, the local holding of a share and the rebalancing of the All Share Index. finweek considers these proposals and the impact of implementing t
the JSE has sent out a proposal on how the local FTSE/JSE indices are constructed, including the addition of an extra index. The impact is not massive overall, but there will certainly be some changes; most notably Capitec* and Anglo American Platinum dropping out of the Top40 and being replaced by Goldfields and Truworths.
The reason for these changes is that the JSE is proposing that the market cap used for inclusion in an index be on the free-float investable market cap, rather than the current total market cap – in other words net, rather than gross, market cap.
In the case of Capitec, while its market cap is around R53bn, the free-float is closer to R24bn. The reason for this is the removal of PSG and other holders who do not make their shares available to be bought on the market.
With Anglo American Platinum, the market cap drops from almost R90bn to under R20bn as parent company Anglo American owns 77.91% of the company, reducing the free-float markedly. These are two extreme examples, but many other companies will see small changes to their free-float market cap.
While this change will initially see some shuffling of the indices and some short-term selling pressure by index-tracking funds on those exiting, it makes total sense. In the long-term the impact is one-off as we move forward with new rules.
The other biggie is a new Top100 index, which uses free-float rules and includes the 100 largest companies on the JSE. I like this. Sure, it really only merges the Top40 and MidCap indices, but it makes sense and it will target inclusion of 95% of the total JSE – based on market cap. It will likely see a bunch of new exchange-traded funds (ETFs) issued over this index, most likely both passive and smart beta funds.
This change is significant to me as an investor, as I will merge my two momentum portfolios (Top40 and MidCap) and use this single index. The impact on my momentum portfolio will potentially be a few different stocks, but more than anything it gives a nice clean benchmark for me to track myself against, rather than having two different portfolios with two different benchmarks.
Another important issue being looked at is the local holding of a share. If a stock has a local holding of less than 5% it cannot be included in any index; furthermore, only the local shareholder register is used for market cap. This means Glencore, while big enough for the Top40, is not included, as its local holding is under 5%. The JSE comments that while Glencore is important and has a large market cap, it is not included and perhaps should be. I tend to agree and the JSE will be looking for a way to include companies such as this.
Lastly, the All Share Index will no longer have to include a minimum of 160 shares and this index will be rebalanced twice a year, in March and September, rather than just once a year in December.
All these changes are currently in a consultation phase until 16 December, so if you have any thoughts you’re welcome to let the JSE know on firstname.lastname@example.org.
Personally, I have no problems with any of the changes. In fact, I think the JSE is doing the right thing with all the changes it has proposed. Indices and their construction must be handled carefully, while simultaneously being allowed to undergo changes in order to keep up-to-date.
The impact is not massive overall, but there will certainly be some changes.
Anglo American’s Tumela mine is located near Thabazimbi in Limpopo.
The JSE’s proposed changes to indices will see Capitec drop out of the Top40.