Is the JSE too small or is the investment industry too big?

More than 1 000 funds can realistically invest in 100 companies.

South Africa has a unique investment industry. There are more than 1 000 collective investment schemes whose equity allocations are predominantly invested in a limited number of JSE-listed shares.

This is mostly due to the growth in the collective investment industry, which seemingly wasn’t matched by growth in the number of large listed companies.

This begs the question of whether the local investment industry is too big or the JSE too small.

A few statistics show that the disconnect is probably larger than many would think.

Profile Media lists 425 JSE-listed instruments (shares, preference shares and other derivatives). The five largest companies (Anheuser-Busch InBev (AB InBev), British American Tobacco South Africa (Bats), SABMiller, Naspers and Glencore) have a collective market cap of R10.5 trillion. This represents 51% of the total market cap of the JSE. It is also roughly three times the SA GDP.

The top ten shares represent 62% of the total market cap. The top 100 shares account for 96%. Companies 101 to 425 represent only 4%.

 

Market cap

% share of total market cap

Top 5

 R7.7 trillion

51%

Top 10

 R9.5 trillion

62%

11 – 50

 R3.9 trillion

26%

51 – 100

 R1.2 trillion

8%

101 to 425

 R637 billion

4%

The reality is therefore that the local collective investment industry has only a very limited number of companies to invest in. Only 23 companies have a market cap north of R100 billion. Number 50 boasts a market value of R40.5 billion and number 100 a mere R12 billion. (See the graph further below of the market caps of the top 100 shares.)

Take into account that foreigners own at least 42% of local shares, it becomes clear that the JSE is not ripe with investment opportunities.

   

Market cap

% of total JSE Market cap

1

 AB InBev

 R2 987 bn

20%

2

  BATS

 R1 869 bn

12%

3

  SabMiller

 R1 413 bn

9%

4

  Naspers-N

 R974 bn

6%

5

  Glencore

 R522 bn

3%

6

  Richemont

 R445 bn

3%

7

  BHP Billiton

 R403 bn

3%

8

 Steinhoff

 R334 bn

2%

9

FirstRand

 R260 bn

2%

10

 MTN Group

 R258 bn

2%

11

  Sasol

 R258 bn

2%

12

  Vodacom

 R251 bn

2%

13

  Anglo

 R218 bn

1%

14

  Stanbank

 R209 bn

1%

15

  Old Mutual

 R191 bn

1%

16

  Aspen

 R173 bn

1%

17

  Mediclinic

 R150 bn

1%

18

  Sanlam

 R134 bn

1%

19

  AngloGold

 R122 bn

1%

20

  Barclays    
  Africa

 R121 bn

1%

Collective investment industry

Turning to the collective investment industry, the scale of the disjointedness becomes evident.

At the end of March there were 1 360 registered collective investment schemes (CIS) in South Africa. Not all funds have mandates to invest in shares and if we exclude all fixed interest, regional and global fixed interest funds the actual number of funds that can invest in JSE counters drops to around 1 180.

South African-focused funds, which account for 89% of assets under management, may also not invest more than 25% of their assets north of the Limpopo. This means the remaining 75% needs to go into local assets.

It seems as if it is becoming more and more difficult to find homes for these investments in the local market.

(Click to enlarge)

Ryk 1

Grey hair perspective

Having spoken to a few grey-haired asset managers, it seems as if it is a sensitive topic.

David Shapiro of Sasfin says it is very difficult to get meaningful stakes in smaller companies. “The market caps of companies slip very fast after the heavyweights. They quickly get smaller and it is difficult to get a meaningful chunk of such a company. Stocks also quickly become more illiquid for big chunks and it becomes difficult to get in and difficult to get out.”

He suggests that companies should at least have a market cap of R40 billion for large funds to trade in. Only 50 companies, including the heavyweights, have market caps of more than R40 billion.

“This is a big problem. There is not a lot left on the JSE if you strip out the big international companies.”

Alwyn van der Merwe of Sanlam Private Wealth says the top 100 companies are the main targets. “We predominantly invest in the top 100 companies, although some selective investments in smaller stocks are done if clients wish to do so.”

He adds that this creates an environment where many funds invest in the same companies, and that the weightings of these companies becomes the major performance differentiator. “For example, if you held too many resource stocks last year, you would have suffered, yet this year is the opposite.”

Van der Merwe says the JSE-listed companies must be some of the most researched companies in the world as there are so many analysts at the various asset managers. “And still we regularly get it wrong!” he says with a smile in his voice.

Size does matter

Another interesting perspective comes from Moneyweb journalist Patrick Cairns who remarked:

“The Allan Gray Balanced Fund is R115 billion at last count. Let’s presume that for any share to have a meaningful contribution to the portfolio it must make up at least 0.5%. Anything smaller than that, and it doesn’t really have the ability to significantly impact returns. In other words, the Allan Gray Balanced Fund must be able to invest at least R575 million into a company to make it worthwhile.

“To have any significant exposure in the portfolio, however, it would need to invest a lot more than that. To achieve a 5% weighting, it would need to invest R5.75 billion.

“The other side of that equation is that if Allan Gray holds more than 10% of any single company, it is creating serious concentration risk on the other side. Its own buying and selling will have too much of an impact on the share price. So in other words, the only companies that the Allan Gray Balanced Fund could potentially allocate 5% of its portfolio to (and this excludes all the other funds in Allan Gray’s portfolio) are those with market caps of greater than R57.5 billion. And how many of those are there? Not even the whole Top 40.”

 

Which raises the question: Is the JSE too small or the investment industry too big?

Or, is the economic and political environment stifling the growth of new challengers to the Top 40?

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COMMENTS   6

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This is a simply a symptom of the financialization of the economy – by which I mean the so called executive/capital allocation sector has come to totally dominate the real economy out of all sane proportion – which is why we have so many wankers in suits in Sandton, and so many dirt poor people everywhere else. Analagous to the class system of Victorian England. And it ain’t just us in .za, this is a world wide problem.

0.5% of 115bn is not 5.75bn, it’s 575m…

The Market Cap table is incorrect as top entry is reflected as only 2Bn and the presence of cents suggests that the wrong set of figures have been picked up.

Thanks for pointing it out. It was a decimal error. The numbers were reflected in millions, which have been rectified.

That should have read “the top entry is only R2m”

Its actually crazy to think about it as a trader, month end and quarter end… close eyes and just load up on as many positions as your account can handle then bomb them in auction.

End of comments.

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