One of the primary reasons Naspers opted to list its global internet assets in a separate company this month was the recognition that, as a single entity, it had become too big for the JSE. Before Prosus was unbundled, Napsers made up over 26% of the FTSE/JSE Swix All Share Index.
When a single company constitutes a quarter of the market, that is an unhealthy level of concentration. It means that even asset managers who are bullish on the stock are going to hold it at a lower weighting than it is in the index, simply because it is too risky to hold that much of their portfolio in a single company.
After the listing of Prosus, Naspers’s weighting in the Swix will fall to 19.2%. Prosus will make up 3.3%. This means that, together, the two stocks will constitute 22.5% of the index, which is lower than before the unbundling.
The reason for this discrepancy is that Prosus has a very small free float. Naspers will still own 73% of the new company, and only around a quarter of its shares are available on the open market. That is what is reflected in the index.
Changes to local indices like the Swix will directly affect investors in exchange-traded funds (ETFs) and unit trusts that track them. Both the FTSE/JSE indices and those maintained by S&P Dow Jones Indices rebalanced at the close of the market on Friday, September 19, and will therefore take effect from Monday morning. Investors in these funds will be impacted in different ways.
Top 40 funds
The largest portion of money in local equity index trackers is held in products that track the FTSE/JSE Top 40. Here, the impact will be similar to that in the Swix.
“The combined weight of Naspers and Prosus after the unbundling and index rebalancing is going to be lower than the original Napsers weight was on its own,” explains Nerina Visser, ETF strategist at etfSA.
At the end of August, Naspers was 24.4% of the Top 40 Index. Following the rebalancing, the combined weight of Naspers and Prosus will fall to around 21%.
CoreShares Top 50
The CoreShares Top 50 funds are the only offerings in South Africa to track the S&P South Africa Top 50 Index. The impact of the Prosus listing in these products will be somewhat counterintuitive in that investor exposure will actually go up.
Zack Bezuidenhoudt, director at S&P Dow Jones Indices, explains that this is because the Top 50 caps the weight of any stock in the index at 10%.
“The Naspers cap will still be in effect, so it will still be 10%,” Bezuidenhoudt says. “Prosus will come into the index at around 3%.”
The combined exposure for investors will therefore rise from 10% to 13%.
Capped Swix funds
Something similar will happen with the funds that track the FTSE/JSE Capped Swix All Share Index. Naspers will remain at its capped weight of 10%, but Prosus will be added to the index at around 3.7%.
“Given the reason for creating the Capped Swix in the first place, namely to avoid excessive weight in a single share, this return to a higher weighting is not ideal,” says Kyle Hulett, head of asset allocation at Sygnia Asset Management.
The combined weighting of the two stocks in the Capped Swix will, however, still be below their combined weighting in the plain Swix, which will be 22.5%.
The Satrix Indi, which tracks the FTSE/JSE Capped Indi 25, will also see its combined exposure to these stocks go up. Originally this ETF tracked the plain Industrial 25 Index, but it switched to the capped version, which limits a single stock to 30% of the index, as Naspers grew too large.
From Monday, however, Prosus will be added to the index while Naspers’s weighting will be unaffected.
“After the rebalancing, Naspers will sit at 30% and Prosus will come in at about 6.7%,” Visser explains. “So that will take the combined weight of Naspers and Prosus higher than Naspers would have been on its own.”
Satrix Equally Weighted Top 40
The impact will be even larger in the equally-weighted product offered by Satrix. With Prosus coming into the index, effectively investors’ exposure will double.
This is because all stocks in the index it tracks – the FTSE/JSE Equally Weighted Top 40 Index – are given the same weighting of 2.5%. Together, Naspers and Prosus will therefore make up 5% of the portfolio after the rebalancing.