The listing of Prosus, the new company that holds the international online assets of Naspers, marks another key step in the unbundling of the South African media group, which holds the biggest weight in the FTSE/JSE All Share Index. This index is the primary measure of performance of the South African stock market.
The unbundling can have significant implications for the composition of investors’ portfolios.
This is especially relevant for index-tracker portfolios since they track the index very closely. For actively managed portfolios, the impact will depend on the actual weightings determined by the portfolio manager, which could deviate significantly from the index weight.
A portfolio’s benchmark determines the nature and composition of an investment portfolio and also how it can be expected to perform over time.
Different benchmarks will behave differently depending on their composition.
Selecting an inappropriate benchmark can therefore have a significant impact on the volatility experienced and the returns achieved by the portfolio.
It is therefore worthwhile considering the impact of the unbundling of Naspers on the various indices commonly used as benchmarks by institutional investors, such as retirement funds, as well as individual investors.
MSCI South Africa Index
The MSCI South Africa Index (the preferred benchmark for foreign investors into South Africa) has seen its Naspers weight shrink by a quarter, from 34% to 25%. Prosus is excluded from the index as MSCI, the benchmark provider, only considers companies with a primary listing in South Africa.
The unbundling of Naspers has therefore reduced the concentration of Naspers in this index.
FTSE/JSE Swix All Share Index
The JSE introduced the FTSE/JSE Swix All Share Index suite in 2004.
The unbundling of Naspers also resulted in the Shareholder Weighted Index (Swix) experiencing a small reduction in the overall weight of the Naspers stable. Instead of one company at 26.2% of the index, there are now two: Naspers at around 19.2% and Prosus at around 3.3%.
The index weight of Prosus is smaller, as a portion of the shareholders do not hold their shares on the JSE share registry, Strate. This reduction was tempered slightly as the unbundled Prosus share jumped nearly 30% on listing day.
However, the combined weighting is still nearly 4% lower than before, totalling 22.5%.
FTSE/JSE Capped Swix All Share Index
The FTSE/JSE Capped Swix All Share Index was introduced in 2016 with the specific aim of reducing the weight of one share, namely Naspers, to avoid excessive concentration. Many South African pension funds and other investors subsequently changed their domestic equity benchmarks from the FTSE/JSE Swix All Share Index (‘Swix’) to the FTSE/JSE Capped Swix All-Share Index (‘Capped Swix’).
It is important for investors to consider concentration risk, because a concentrated exposure to a single share heightens the risk of a company-specific issue adversely affecting the value of that share, resulting in an outsized effect on the portfolio.
It is about the old investment adage of not having too many eggs in one basket.
Effect of the split on the Capped Swix index
|Weight in Naspers||
|Weight in Prosus||
|Total weight to Naspers stable||10%||13.7%|
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, although it is still below the full uncapped Swix weighting by Naspers and Prosus of 22.5%. The uncapped Swix now has a 9% higher allocation to the Naspers stable than the Capped Swix , down from 16% before.
How will this impact investors?
- Retirement funds
The FTSE/JSE Capped Swix All-Share Index is the most commonly used benchmark by South African retirement funds. Therefore, retirement fund trustees need to consider that the unbundling of Naspers and the listing of Prosus has led to an increased exposure to the overall Naspers stable in the index.
- Index-tracking portfolios
With index-tracking portfolios increasing in popularity with investors, investors should be aware that any significant changes in the composition of an index will have a direct impact on the performance of their investment portfolio.
Since investors are exposed to all the stocks and their weightings in the index, any changes are likely to impact on volatility and performance.
- Offshore exposure
For investors referencing the Capped Swix All-Share Index, the unbundling has resulted in a higher exposure of almost 4% to Chinese stocks via Prosus. Therefore, investors looking for increased offshore diversification will benefit from the change.
However, investors concerned about balancing local and offshore assets because their expenses are in rands need to be aware of the additional offshore exposure.
Kyle Hulett is a member of the Investments Committee of the Actuarial Society of South Africa and head of asset allocation at Sygnia