Weighing in on weightings

A few large companies have significant pull on the performance of the JSE top 40 index

The weightings of various shares on the JSE indices are important in terms of how an index performs. This has been abundantly clear on the top 40 index in the first few months of the year. The top 40 index is a free float* market capitalisation weighted index of large-cap stocks on the JSE.

The weightings of the top 40 are heavily skewed to a few really large companies, and these companies have a significant pull on the performance of the index. Since the start of the year, the two largest companies by weight on the top 40 have performed exceptionally, and this has helped to lift the overall index.

A table illustrating the weightings of the 10 largest stocks on the top 40 index is shown, along with the year-todate performance of those stocks. Notice how Naspers and Richemont have performed extremely well, with gains of 32% and 25% for the year to date. These are also the stocks with the heaviest weightings on the index. Together they make up about one-third of the weighting of the top 40 index.

The only other stock that has performed relatively well is British American Tobacco, with a gain of 18%.

The table shows a very lacklustre performance for the remaining stocks on the list.

To understand what a difference the weighting of Naspers and Richemont has made to the top 40 index, it is instructive to compare the Satrix 40 exchange traded fund (ETF) and the CoreShares equally weighted top 40 ETF.

The Satrix 40 is an ETF that mimics the performance of the JSE top 40 index. It has the exact same weightings and performs exactly in line with the top 40. The CoreShares equally weighted top 40 ETF weights the shares equally. So the largest shares by market capitalisation attract the same index weighting as the smallest ones.

Note what a difference this has made to the two ETFs’ performance since the start of 2017. The Satrix 40 is up almost 8% for the year to date, thanks to the hefty weightings and stellar performance of Naspers and Richemont. On the other hand, the CoreShares equally weighted top 40 ETF has delivered a performance of about 2.5%, tracking sideways for the year to date. Put another way, the skewed weighting of Naspers and Richemont added about 5.5% in performance to the top 40 index.

That’s not to say this will continue to be the case. If we were to enter a period in which the largest stocks in the index

Gains witnessed on the JSE this year have not been broad based