JSE performance: It’s a big tail wagging the friendly dog – but can the dog turn nasty?

The tail is Naspers – the dog is the JSE. Though, to describe the JSE as a dog, would be to do it an injustice given its good behaviour over the years. Naspers (NPN) – the media giant that derives much of its value from its Chinese internet associate Tencent – has been a major contributor to the performance of the JSE over recent years.

Its share price and market value has risen dramatically and as a result Naspers now contributes close to 10% of the market value of the JSE. The company is now worth R597bn and ranks as the third largest company listed on the JSE, behind British American Tobacco with a market cap of R1.287 trillion and SABMiller worth about R990.6bn (all market caps as at 20 November).

Naspers is moreover by far the largest company included in the JSE SWIX Index (with a 10.4% weighting) where the value of the company is adjusted for the proportion of shareholders in the company registered in SA¹. The SWIX is the benchmark which many active SA Fund managers use to compare their performance and hope to beat. There are two other companies with a weight in the SWIAX of over 5%: MTN (7.62%) and Sasol (5.74%). The next largest weights are given to SABMiller (3.93%) and British American Tobacco (3.84%). In the figure below we compare the JSE All Share Index (ALSI) and the SWIX from its inception in 2002. The SWIX has outperformed the ALSI in recent years.

This difference in realised returns recently is largely explained by the larger weight of Industrials and Financials in the SWIX and the smaller weight in Resources companies, given the underperformance of Resources in recent years. The best returns on the JSE have come from companies with an increasingly large global footprint, of which NPN is the outstanding example. Others include Richemont, SABMiller, Aspen and British American Tobacco, all with large weights in the SWIX and somewhat lower weights in the JSE All Share Index. We like to separate these Global Consumer Plays that depend on the global economy from the other Industrial companies on the JSE that depend much more heavily on the fortunes of the SA economy.

In the figure below we compare the share prices of the five largest companies listed on the JSE based on a January 2011 starting point. The Naspers share price has moved well ahead of the large cap pack with mining company BHP Billiton proving the distinct underperformer. Note that the large cap strong performers are all companies catering to global consumers.

While the value of Naspers and the other Global Consumer Plays have increased dramatically in recent years, those of BHP Billiton and long time favourite Anglo American (AGL) have barely increased.

As a result of the stellar performance of Naspers the ALSI and the SWIX have come to dance increasingly to the tune played by Naspers. We compare recent daily moves of Naspers and the ALSI below. A good or bad day for Naspers (given the size of the company) will translate almost automatically into a good or bad day for the market as a whole, particularly in recent days when the Naspers movements have been particularly severe.

In other words, investors who track the JSE and the SWIX on a market cap weighted basis have become increasingly dependent on or vulnerable to the Naspers share price. Adding proportionately more Naspers to a JSE-based portfolio would have served investors very well. However a weight of as much as 10% in any one company will bring exposure to a great deal of firm specific risks – such a portfolio or benchmark that included Naspers at its full weight could not be regarded as well diversified or a low risk portfolio. The SWIX, with its large weight in Naspers, MTN and Sasol with over 20% of the Index in these three stocks, should not be regarded as a suitably well diversified benchmark.

An alternative way to calculate a representative market would be to calculate an equally weighted portfolio of the Top 30 most valuable companies listed on the JSE. We compare this equally weighted Top 30 Total Return Index, rebalanced each month, to the total returns realised by the SWIX and ALSI. As the chart shows, the Naspers-dominated SWIX outperformed the ALSI and also the equal weighted Index. In the accompanying table the average monthly returns and risks of the alternative benchmarks have been very similar, though the SWIX has produced superior returns since January 2011 with slightly less risk than an equally-weighted Top 30 portfolio.

As we show below, an equally weighted Index may well outperform a market cap weighted index, as was the case between 1995 and 2000 on the JSE when the market as a whole moved mostly sideways.

Sticking closely to the SWIX weights in recent years would have served a portfolio well. However a more consistently diversified portfolio, while it may miss some of the big winners, will also help investors avoid the big potential losers. Furthermore, when the index acting as the benchmark is itself not well diversified, the dangers of following large companies passively when they lose value are much increased. As is often said of active management of portfolios, it is important to avoid the big losers, perhaps even more important than picking the winners. When the tide is running strongly in one direction, riding the wave regardless of risk will seem like a very good idea. When the tide turns, getting off the surf board would be an even better idea. The active investor is naturally conscious of risks that the passive index tracker will not recognize, especially when the index becomes increasingly concentrated, as it may well have become in the case of the SWIX.

¹Shareholder Weighted (SWIX) Indices have the same constituents as an existing market capitalisation weighted Index. However, all constituents are weighted in the SWIX indices by applying an alternate free float, called the SWIX free float. The SWIX free float represents the proportion of a constituent’s share capital that is held in dematerialised form and registered on the South African share register, maintained by Strate. The SWIX free float will not exceed the company free float.