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[TOP STORY] Index changes make benchmarking meaningless

BHP’s weighting in the JSE Top 40 will drop from ±13% to ±2% on 18 March. Graeme Körner of Körner Perspective digs into this trend, that makes using the index as a benchmark largely meaningless.


SIMON BROWN: I’m chatting now with Graeme Körner [from] Körner Perspective. Graeme, I appreciate the early morning time.

I was chatting with Siya [Nomoyi] from Satrix a few weeks ago around the changes in weighting of [the] BHP Group in our index, [which] is going to be dropping in the Top 40 from some 13% down to around 2%. The benchmarking – we are going to dig into this.

SAB was almost 15% of the index when it exited in June 2016. We’ve seen the deals with Naspers, and what we are getting a sense of is that some of these companies exit. SAB, since the exit, Anheuser-Busch has lost more, almost half its value. But Anheuser wasn’t in the index. So that 15% gets locked in and that then suddenly says, well hang on a second, this Top 40 [is] probably actually looking a whole lot better than it really is.

So talking benchmarking, I was talking with Siya from Satrix a few weeks ago around BHP Group dropping from 13% to 2%. As it’s sitting at record highs, you pointed out this happened in 2016 when SAB left and they were 15% of the index and of course Anheuser-Busch InBev comes into the index. But it didn’t come in because it’s tiny, because of the inward listing status. The index in a sense then becomes an artificial process in that it locks in some great numbers, but it’s suddenly not actually a proper, fair reflection of, truthfully, very much – or am I being overly harsh?

GRAEME KÖRNER: No, I think you’re spot on the money. Of course the other big one was Naspers, who at a point in time represented over 30% of the index and a variety of corporate actions. I think that’s really the point that I’m making.

It’s not as though companies like BHP have left the market and suddenly are no longer active in the South African economy – not that they really are, or even Naspers for that matter. Nothing changed other than corporate actions in the case of BHP. For example, the consolidation of the plc into the group structure, and suddenly a weighting goes from, I think 14%-odd to 2%. The point that I thought was worth making was if we unpack these three scenarios, I think we can maybe park BHP because we don’t know what the future holds right now.

But if you look at the case of SABMiller at circa 15% of the index when Anheuser-Busch took it out, effectively what I’m saying is at R950 or whatever, you are effectively locked in that level. The way indices work, as you know, then 15% comes out and that 15% gets redistributed, and obviously a fair whack of that got pushed to Naspers and a couple of the other big caps, but also was, of course, pro rata distributed among some of the smaller guys fast-tracked (?) over a period of time.

So I think the point that I’m trying to make – so I don’t lose my train of thought – was that had SABMiller not been taken out at £944 or whatever, and you and I both know that I think it came pretty close, because I think the SAB board did an amazing job of doing a great deal. At the time I think we had the conversation and I said [that] I think Anheuser-Busch is going to regret this acquisition. Although it’s a great company they just paid completely over the odds. So the point is, if you look at what Anheuser-Busch has done since that delisting, it has lost about half its value.

So let’s just hypothesise for a second. If we didn’t take cash – and obviously some people took some in Newbelco as well – … you would then effectively have seen your 15% holding reduced probably in line with many companies like Anheuser-Busch. So all I’m saying is [that] the way the index is, the anomaly in South Africa [is], we tend to have a handful of companies, often three or four or five companies, that represent half of that basket (we’re talking specifically about the Top 40, of course). Effectively what it does is it locks in a level.

Now, in the case of SAB you might say, well, our gain, the market’s gain was Anheuser-Busch’s pain. But the flip side is it does create an anomaly because effectively you are locking in performance that possibly isn’t real, particularly if you had, for example, taken Newbelco shares. Then fast track, of course, the same scenario plays out with Naspers, with their core production. I think the difference though, is in BHP and Naspers’s case, [they are] both gorillas. You’ll remember [that] Naspers was over 30% of the index if you go back a year … this is pre the Prosus-Naspers share exchange which was what resulted in Naspers at the time going from, say, over 20% of the index down to the current sort of 6%, obviously some weaknesses contributed to that. But again, you have the issue that that index was locked in, I believe artificially, because of that corporate action. Because you and I both know that over the interim period, over the year from, let’s say, March ’21 or April ’21 to date, we’ve seen Naspers itself lose 50%. Had that corporate action not happened – the share exchange and the subsequent re-weighting – effectively our market wouldn’t be where it is now because obviously that excess weighting was then redistributed among Richemont and Anglo American and BHP Billiton, and increasingly the precious metals and so on.

SIMON BROWN: … markets, the world over, we get so fixated on indices, both as [at] the beginning of the show, I quote indices and we use them as benchmarks to reference our own performance. But what you’re saying makes perfect sense and then says to me that indices are nice, but they’re perhaps not the sort of status, for want of a better phrase, that we hold them up to be. Particularly I’m thinking for folks who are benchmarking against it.

GRAEME KÖRNER: Absolutely. Simon, I think the other point is, and the passive disciples out there will be saying – well, that’s the reason you invest in the index. But the reality is you do have to say, well, is it sensible if you go back again to, I think it was, March last year [when] Naspers, Richemont and BHP represented almost 45% of the index.

So there is a worthy debate to be had about do you buy a tracker because it’s a broad-based metric of what’s happening in a market, because truthfully those companies have very minimal – if you look at asset value or earnings contribution – South African exposure.

Of course the other thing is if you were managing an active portfolio that is benchmarking to this, and you said, well, I need to sort of be around the benchmark because I don’t want to underperform – and let’s be honest, that is very prevalent in the industry – the problem that you’ve got is if you hold truckloads of SAB and they get delisted, you trigger a CGT [capital gains tax] event [and] that CGT leakage is not obviously captured in the index and that problem compounds over time.

So again, the passive devotees would say, well, there’s your argument, just go into passive.

But Simon, something that we are working quite a bit on is the relevance of benchmarks. I’ll give you an example.

If you were a ‘conscience investor’ or a faith-based investor and you said, look, a few years ago SAB and British American Tobacco and Remgro or whatever represented fairly significant weightings, but I cannot actually invest in those because my conscience or my faith disallows it, and you then still are benchmarking back to this magical Top 40, it creates massive problems. I think it also can potentially cause people to manage money almost in a defensive way, so that you don’t miss the benchmark.

So I think what I’m trying to say is benchmarks are fantastic, but they’ve got to be relevant and they’ve got to be appropriate for the investor. I think also…there are unintended consequences of indices.

I suppose the question is what you want that benchmark to represent? If you say, look, I’m mercenary or agnostic, I don’t really care if I only hold four shares and they represent 80%, and I don’t care, even though I’m investing in SA assets, that [they don’t] reflect SA, then that’s fine.

But I think the discussion is just that the anomalies of the South African market, inward-listed, dual-listeds, corporate actions and things have triggered events that I believe are creating a very misleading performance indicator of the broader market, and that I think the time is right to just have a deeper conversation about what index is actually appropriate for you.

SIMON BROWN: Yeah. That’s a good point. You make a great point there. Ours is a lot more nuanced perhaps than some of the US, because of all those issues around inward and outward and all of that sort of thing. The  key point is know your benchmark, know your index, know what it is, know what the plan is.

Graeme Körner [from] Körner Perspective, I always appreciate the early morning insights.



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