The French have a saying, “comparer des pommes et des poires,” which means to compare apples to pears. While there are numerous scientific reports on the similarities between apples and pears, the moral of the story is that when comparing things, you have to make sure that they are actually comparable and that you don’t end up comparing two completely different items or subjects.
Around the end of February, I published a table comparing the 1-week and 1-month returns of the top 10 largest MSCI Emerging Market indices in USD-terms on social media. I was told fairly quickly that the data couldn’t be correct, as the table showed that South Africa lost 5.34% of its value in USD-terms in February.
The argument against my post was that if we adjust the rand-based returns of the FTSE/JSE All Share Index (+3.41%) by the Rand/USD weakening (5.89%), that it would leave the actual figure in the vicinity of -2.5% in USD-terms. My response to this is that if you compare different MSCI indices (MSCI is one of the largest international index suppliers globally) and then decide to throw an index into the mix that isn’t an MSCI index in any way, you are, in fact, comparing apples to pears.
I decided, however, not to discuss my opinion on what I believe to be wrong or right, but rather to highlight the differences between the four largest South African stock market indices this week. These four indices appear on most fund fact sheets (also known as minimum disclosure documents or MDDs), and I believe that the information will help investors to compare apples with apples when considering investments in shares.
1. FTSE/JSE All Share Index
This is probably the most well-known index in South Africa and it’s mostly just referred to as the JSE. This index represents 99% of the total capital value (before any adjustments made in terms of investable weights) of all ordinary shares listed on the JSE’s main board. They also have to conform to certain minimum liquidity and free float criteria (calculated by multiplying the share price by the number of shares that are readily available in the market). Even though shares like British American Tobacco (BATS) and Anheuser-Busch with primary listings on other exchanges/indices find themselves on the JSE’s main board and will therefore be included in the FTSE/JSE All Share Index, despite the fact that they have as companies and income streams, very little to do with South Africa as a country.
2. FTSE/JSE Top40 Index
As its name suggests, this index consists of the 40 largest companies according to market capitalisation on the stock exchange. The free float methodology is also applied to this index, which means that although a share like Anheuser-Busch is the largest company listed on our stock exchange by far, it only has 1% free float available, which doesn’t make it large enough to be included in the Top 40 largest companies according to net market capitalisation.
3. MSCI South African Index
This index consists of 50 JSE-listed large and medium (mid) capitalised companies. These companies must have their primary listing on our stock exchange (JSE). This means that shares like Anheuser-Busch and BATS (and all shares whose names are followed by PLC) which have primary listings on other stock exchanges, are not represented in this index. Most people will argue that this index is more representative of South Africa as a country and obviously our local businesses, but the disadvantage right now is the fact that currently, one share (Naspers) makes up 30% of the total index.
4. FTSE/JSE Capped SWIX All Share Index
This index is making its appearance on more and more MDDs. But before we get to the “capped” part of this index, I would like to explain why SWIX finds itself at the core of this index. This index consists of exactly the same shares as the FTSE/JSE All Share index, but the weight of each share is calculated according to an alternative free-float method, whereby only shares that are registered and held in dematerialised form in South Africa (maintained by STRATE) are used to determine their weights in the index. The capped part refers to the weight that each share is capped by in this index, which is 10%. This means that even Naspers, which according to the FTSE/JSE All Share Index currently represents a whopping 19% of the total index, will also be limited to a weight of only 10% in this index.
All these differences considered, the question remains on how these four indices compare to one another in terms of returns. The short answer, is that they actually show very similar results in terms of historical general movement. The differences, however, only appear once you take a closer look. The MSCI SA Index in rand terms, for example, moved more in line with the Top40 Index, which outperformed the FTSE/JSE Capped SWIX All Share Index by between 2% and 2.5% per year.
But that can be seen as somewhat of a misrepresentation of what actually happened if we use the first two mentioned indices as benchmarks, seeing that Naspers’s 22.5% annual returns over this 2-year period definitely gave these two indices a massive boost. If we look at the returns of each share listed on the FTSE/JSE All Share Index individually, you will see that the average annual return was only 0.82% per year, and not between 5% and 6% as stated.
To conclude, it’s important to know what investors are talking about when they speak about the South African market and, more importantly, to know what fund managers and exchange traded funds refer to when measuring fund goals against a particular index.
The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.