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

Finweek English Edition - - NEWS - By Si­mon Brown ed­i­to­rial@fin­ *The writer owns shares in Capitec. Si­mon Brown has been in­ter­ested in the stock mar­ket since his school days in the 1980s and bought his first share a week be­fore the stock mar­ket crash of 1987. He started his fi

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 in­

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.

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