Behemoths dominate Top40
• JSE index is ‘not as diversified as the investors who track it might believe’
Investors buying the JSE Top40 index, the bourse’s most popular index and a collection of the country’s 40 biggest stocks, are in fact investing in only 12 shares, says CoreShares.
Investors buying the JSE Top40 index, the bourse’s most popular index and a collection of the country’s 40 biggest stocks, are in fact investing in only 12 shares, says CoreShares.
The capped Top50, in which the weight of any single stock was limited to 10%, had exposure to only 23 shares, said Gareth Stobie, MD of exchangetraded fund (ETF) provider CoreShares. ETFs trade like stocks on the JSE but track an index, commodity, bonds or a basket of assets.
The reason for the concentration is the relative size of a handful of heavyweights.
Uncapped, Naspers makes up 23% of the Top40. Luxury goods company Richemont and BHP follow with weightings of 8.73% and 8.08%, respectively. The largest 10 stocks make up 66.1% of the Top40, indicating that the index is not as diversified as the investors who track it might believe.
The popularity of indextracking products, so-called “passives”, has soared in recent years, driven by lower fees and better performance relative to most active asset managers.
The passive market was still in its “infancy” and was likely to keep growing, said Leon Campher, CEO of the Association for Savings and Investment SA (Asisa), the industry body for life insurers and asset managers.
CoreShares figures show that index-tracking products, excluding commodity ETFs, have less than 5% of assets in the R2.2-trillion unit trust market. The rest belongs to active asset managers. In the US, passively managed assets account for about 23% of the market.
Index tracking was not “a silver bullet”, Campher told Business Day. “You should scrutinise your asset allocation.”
Sunette Mulder, senior policy adviser at Asisa, said investors had to know that “if the market goes down, you’re going to go down with it”. Some indextracking funds had recently changed the index they tracked to the capped version, she said.
The JSE had “always been a market where a handful of shares are very dominant”, said Warren Ingram, an executive director at Galileo Capital.
“In the commodity boom you had Anglo [American] and BHP together representing close to a third of the market. Resources now as a component of the Top40 are not close to where they were 10 years ago,” he said.
Despite the collapse in resources, index investors had done very well over 20 years, said Ingram. “When you look at the net result for investors over time, it’s hard to argue that investors have been prejudiced by [a handful of shares being disproportionately big]. As sectors start to perform at different times, index investors don’t necessarily get prejudiced by that one share or handful of shares that underperform.”
Concentration risk was best resolved through diversification.
“If you can select only one investment and it is going to be South African, consider the capped or equally weighted Top40. But if you have a wider range of options, buy the uncapped Top40 and then buy a global ETF and an emerging markets ETF,” he said.