Don’t compare apples to pears | Fin24

Don’t compare apples to pears

Mar 20 2019 12:49
Schalk Louw

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 one-week and one-month returns of the top 10 largest MSCI Emerging Market indices in US-dollar 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 dollar 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 R/$ weakening (5.89%), it would leave the actual figure in the vicinity of -2.5% in dollar 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 for this edition. 

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.

FTSE/JSE All Share Index

This is probably the most well-known index in SA 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). 

Shares like British American Tobacco (BAT) and Anheuser-Busch (AB InBev) 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 as companies and income streams they have very little to do with South Africa as a country.

Schalk Table

FTSE/JSE Top40 Index 

As its name suggests, this index consists of the 40 largest companies measured by market cap on the JSE. 

The free-float methodology is also applied, which means that although a share like AB InBev is the largest company listed on the JSE 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 cap. 

MSCI South Africa Index

This index consists of 50 JSE-listed large and medium (mid)-cap companies. 

These companies must have their primary listing on the JSE. 

This means that shares like AB InBev and BAT (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 SA as a country and our local businesses, but the disadvantage right now is the fact that currently one share (Naspers*) makes up 30% of the total index. 

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, 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 SA (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 currently represents a whopping 19% of the total index, will also be limited to a weight of only 10%.

Schalk Louw is a portfolio manager at PSG Wealth.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 21 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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