Local shares determine Top 40

It’s often thought that the JSE Top 40 is made up of the 40 largest firms listed on it. But it is, in fact, the size of its local share ownership that determines whether a company makes the cut.

Mark Randall, the manager of indices and valuations at the JSE, said the first criteria to be included in the Top 40 is that the company must be listed on the All Share Index. This index is reviewed in March and September annually and qualifying firms must meet the eligibility criteria.

Broadly speaking, the rules include:

The company must be listed on the main board of the JSE.

The firm must trade 0.5% of its investable market capitalisation on the JSE each month.

At least 15% of the company’s global issued shares must be available to trade.

Foreign firms must have a minimum of 1% of their total issued share capital held in South Africa.

Anheuser-Busch InBev, which acquired SABMiller, does not appear on the All Share because it doesn’t have that 1%. “Despite AB InBev having a market capitalisation of nearly R2.5-trillion, less than R25-billion is held in South Africa,” said Randall.

Once the All Share is selected, it is used to select the Top 40. The latter is reviewed quarterly and ranks companies on “free float adjusted market capitalisation” rather than “gross market capitalisation”. The free float adjustment excludes numerous types of shareholdings that are deemed to be not freely available, such as director holdings, strategic holdings, holdings subject to a lock-in clause and holdings on a foreign share register.

“Glencore is a top five company in terms of market capitalisation, putting it near the top of the All Share Index, and Large Cap Index for that matter. However, only about 3% of its shares are held in South Africa, so when we get to the Top 40 space, we only include this fraction of its total market capitalisation,” said Randall.

“Using this investable market capitalisation measure, Glencore ranks near position 60 in terms of investable companies in South Africa. As such, it is not added to the Top 40.”

Randall said the Top 40 is designed for local investors and aims to capture the 40 firms that are held in the largest value in aggregate in the local market.

“As a result, we see that a company like Truworths, with a market cap of R33.7billion, is included over a company like Glencore, with a market cap of R742.7-billion, because Truworths is held in greater value in South Africa [with a local shareholding of R32.7-billlion compared with Glencore’s R22-billion],” he said. “Similarly, a company like Anglo American Platinum ranks at number 27 in the All Share and Large Cap space, but at 61 in the Top 40 space, due to the Anglo American holding, which is excluded from the free float.”