Join Warren Ingram and Romelon Chetty, a quantitative analyst at Prescient, as we explore the world of index investing, from the Dow Jones to the JSE Top 40. We'll delve into how these indices shape market performance and fund management, and the crucial role of discipline and delayed gratification in personal finance. Get ready for insightful revelations that connect the dots between global financial trends and individual decision-making.
Topics/ Questions:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Join Warren Ingram and Romelon Chetty, a quantitative analyst at Prescient, as we explore the world of index investing, from the Dow Jones to the JSE Top 40. We'll delve into how these indices shape market performance and fund management, and the crucial role of discipline and delayed gratification in personal finance. Get ready for insightful revelations that connect the dots between global financial trends and individual decision-making.
Topics/ Questions:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Brought to you by Pressient Investment Management. Informed by science, guided by insight, pressient Investment Management is an authorized FSP.
Speaker 2:Welcome to Honest Money. We're talking about one of my favorite topics in the world and that's index investing. It's something I've spoken about, written about, for many years and I'm certainly a big fan. I don't think I would invest all my money in one index or just an index investing, but certainly, personally, at least about half of my money over time is invested in an index, and when I started, especially in South Africa, I loved index investing because there was only one choice, and I'm kind of a simple guy, so if you give me no choice, that's great.
Speaker 2:I love that we had this thing called the JSE Top 40 Index. It was the only investment available and so that was great. I just bought it and it did very well for me and everyone else who started there. But it's not unique to South Africa, this indexation thing. It's actually a global phenomenon which arrived in South Africa maybe a little bit late, and to talk about it I thought let's have a chat to someone who understands this stuff much better than me. So, romelon Chetty. He's a quantitative analyst at Pracient Investment Management. Thanks for joining us, romelon.
Speaker 3:Hi Warren, Thanks for having me. Pleasure to be here.
Speaker 2:So maybe, before we get into the nuts and bolts about what's happening today, let's jump back. So how did this indexation thing start?
Speaker 3:Okay, so the stock market's been around for a long time now and equity indices have played an important role in helping investors assess the overall market performance, because previously investors had to go calculate each shares return and then somewhat aggregate in. All investors had different ways of doing this and there's no real consensus. So everything about one of the early indices in the US was the Dow Jones Industrial Average and that basically gave investors a sense of assessing the overall market performance. And since then there's been a plethora of indices that have come around with different methodologies from different index providers. You know the common ones Morgan Stanley, standard Poor's, ftse and the objective of all of them was to get a sense of the overall market performance. If you just bring that to South Africa, as you said, we had the top 40, which is made up of just the top 40 shares, and then since then we've got the Oulshay index, which is 130 Outshares averaging over time, and then other methodologies, which is the shareholder weight, which is the SWIX.
Speaker 3:And yeah, that's the brief history of how indices have come around, and there are different methodologies in which these indices are calculated. The common one that we all know is the market cap weight is just the value of each company and you weight them via that, but then it's also equally weighted and price weighted and it depends on the investor's preference for what type of benchmark they require and then over time, the interest in passive and, as you said, index investments. Almost everybody has to have some sort of investment in some sort of indexation. That's where the use came for fund managers. There's a way to benchmark, there's a way to mimic the performance of the overall market and, yeah, in present investment management we provide these indexation methodologies through the equity team throughout systematic investing.
Speaker 2:So let's just we've touched on a few things there that I'd like to kind of expand on a little bit. So we in the original index. So the interesting thing about that Dow Jones index is, I mean, it is still the most well-known, I think, in the world and I feel kind of it's a little bit useless. You know, it's almost an anachronism. You know, if you want to know what the American stock market's doing, I would think the 500 biggest shares you know would be a more valuable one than this kind of. You know, I can't even remember how many shares in the Dow Jones, but it's not a lot and it always feels to me like it gives a misleading picture. But standard and quiz, and you know when people are searching for these things, you would look at the and it's literally the letter S, the, and sign in P. So S and P 500 would be then the 500 biggest companies that are traded on the stock exchange. That for me made a lot of sense. That that's, you know. That'll give you a good idea of actually what's gone on in the US market over the day, the month, the year, whatever the period is that you're interested in.
Speaker 2:In South Africa the top 40 made sense to me to give a sense of what the JSE was doing. But I kind of got a feeling over time that the fund managers kind of said hang on, that's an unfair index. If you want to know, we're managing money and now you're judging us against this top 40 index. It's not fair. You need to judge us against something that's more representative of our choices. And kind of my sense was that they didn't like the fact that in the early days it was kind of anglos and bulletin where the two biggest shares and they accounted for a huge proportion of the market and then more recently it became NASBAS you know now I guess NASBAS and process and that accounts for a huge proportion and no one fund manager really wants to allocate 25% of our retirement fund to a share. So they wanted something more measurable and more fair to them. And then they created this thing called the SWIX, the shareholder weighted index.
Speaker 2:And I just want to stop there for a second because I think that that's fair. It's a fair point to say give us something more measurable. I'm not convinced that the average investor out there who just wants to put their 500 or 10,000 rand into something really cares Like. I think they want something that simple that they understand. But the one that kind of appealed to me a little bit was then the equally weighted index, which if and you're going to have to correct me when I go wrong, because I'm sure I'm going to go wrong but that says take the top 40 shares but you allocate an equal amount of money to each one, so it represents the biggest company and the smallest company account for the same value. Is that right?
Speaker 3:Yes, yes, that's what it does. So if you add 10 shares, each of them will be 10% and through the period. So they only reset that at every indexed balance period March, june, september and December. But through the period, market moves can move that 10% upward down depending on how the shares perform. But, as you said, yeah, in South Africa we've had this top 40 index from the equities team. Our oldest offering is the top 40, but over time investors' appetites have changed and, as you said, there's yeah, there's investors wanted different index offerings. So if we just take a step back in South Africa, we've had the top 40 shares that accounted for, obviously, the top 40 shares in South Africa, but we found that, or, if you just look at it, it's a very resource-heavy sector index and that's a result of a lot of these grandfather companies that the JCE refers to is where they have listings overseas, but they also have listings in the JCE and those shares have the full shares allocated in the index, rather than what South Africa, south Africans have access to. So there's a term called free float, which is the available shares to the South African market and the free float factor which for for these grandfather companies in the top 40 index was including all of it. What global investors? So it wasn't a proper representation of the South African market. Just speaking to the other point that the fund managers are not only investing in top 40 shares, they're investing in more than that, because there's some shares, which they refer to as mid-cap stocks, that are still reasonably large in size but have not been included in top 40 because the top 40 only has 40 shares. So that was the South African all-share index, which has now around 127 shares.
Speaker 3:So the was the first major big broad market index and, as I said, the issue with that was that we have all these companies like Anglo-American APMBev that have these large weightings Anglo-American still 10% of the index at the moment, whereas South African investors only represent maybe 1% of that 10%. So then they came up with this fixed methodology shareholder weight. They said let's at every quarter take a snapshot of what South Africans own of all of these shares listed on the JSE and we'll use that as a way to weight the shares. So then you see shares like Anglo-American coming down from 9% to 3%, and that's the difference currently between the SWIX and the all share index. It's about 6.5%. But then you said that you have shares like Naspers massive share in the SWIX. It's following the new rules.
Speaker 3:This is what South Africans own, because Naspers is a South African wholly owned company and it's weight was 20% and we have a lot of retirement money in South Africa that can't invest 20% in one share. It doesn't make sense that concentration is too high. So then they came up with this capping methodology, which they capped each share. At times the capping weight has changed, but the most common one over time was 10%. So they came up with this cap series. They also applied it to the all share, but to the SWIX, and in my experience we've seen this gravitational pull from money in the investment space to the cap series index. Investors prefer this benchmark because, one, it offers the South African representation of the South African market via the SWIX methodology and, two, it limits concentration risk and provides better diversification and kind of overall improving market liquidity because you're taking allocations from Naspers and you're spreading it out to other shares.
Speaker 2:So I mean, I take the point and I think something like an equally weighted. What's nice about it for investors is it's a simple thing to calculate, it's a simple thing to understand and I think that's always my problem with investment products is the moment you get complexity it becomes hard for an investor to understand. And that kind of understanding is important because when things are going well we don't really look at it too much. We just go my 100 is now 110 and life's great. But when it goes 100 to 90 and then 100 down to 70, investors get impatient and investors get unsettled. And then understanding of what they own, I think makes a huge difference, because then they might be more likely to stay in what they own if they understand it, as opposed to something that just confuses them. And they were happy to own it when it was going up and they didn't really care in how it's going down. Now they care a lot. So I like that sort of equally weighted index or the capped index to some extent.
Speaker 2:I also can't, and I don't think it's a South African issue, I think it's a global issue, but I also think a lot of the people that came to the indexation space late product providers. They needed to find a reason to kind of exist and to have their own product. So I love the fact that in South Africa you had the top 40 index for a long time and then suddenly you got the top 50 index and there was like huge marketing around it because it's 10 more shares and it's more diversification, whereas I think the all share index makes a lot more sense to me. So, as you say, 120 plus shares, that's diversification, going from 40 shares to 50 shares. I can't help but feel that's not that much more diversification.
Speaker 2:So I like the fact that you can kind of create something that's simple, low cost and then broadly spread. That makes a lot of sense to me. But now we're getting to the world where we've got a lot of product. If I look at exchange-traded funds and index-tracking unit trusts, they are so mean. There'll be one that will track the tech sector in America but you can buy it in South Africa. And then there's one that can track China and you can track multiple different versions of index-tracking products that just track shares in South Africa, whether it's the financial sector, the industrial sector, the mining sector. I think there's too much choice, I think there's too much going on, and I'm hearing about this phrase called harmonization. So I mean, I don't understand it and I'd love you to explain it to us.
Speaker 3:Okay, great, yeah, that's why we're here today. So the index harmonization talk has been going around since 2019. And it's because we have these two major streams of indices in South Africa the all share and the SWIX, and obviously the cap variance. The question always is for investors, what is the performance of the South African market? And some people say it's the all share and some people say it's the swix and, as I mentioned, there were these companies that were so large that their weights in the all share index were disproportionate. But over time there's been corporate actions. Bhp did a unification, richmond had a Add a deposit receipts program, which they have now terminated, and those weights of those shares have now come down in the all share index From really high levels to what it is in the swix. They're very few shares that Are still largely different and the one major one, as I mentioned, is Anglo-American, which has primary listing on the London stock exchange. It's about close to 10% in the all share index and about 3% in the in the swix.
Speaker 3:And because it's been this convergence over time of the two indices, the, the JC has had consultation with the markets and overall, the consensus has come to that we need to merge this methodologies and and and, and. The agreement is that swix is the way forward because it's a representation of the South African market. A lot of these big companies have done their corporate actions, apart from from Anglo-American, and what we're going to see so. So the timeline for this now is that there's a phase one that they're doing and that's going to happen at the JC index rebalance in March usually happens on the third Friday of Of the quarter month, which is March, june, september or December, and they are going to align the all share methodology to the swix methodology. So so in March the very next trading Monday after that third Friday we're going to see the all share index and the swix index be exactly the same in weight. And and one.
Speaker 3:The one question people would ask is are we going to have a lot of churn if we did this 10 years ago, when there were many of these companies that Would disproportionately wait in large differences? And yes, but, but now we just have the one or two shares and they shouldn't be that much churn in the market. So I don't think we're going to see too much value destruction from a huge salops. Yeah, and overall, I think the objective is to get to one single performance benchmark standard that represents South African market and it's a. It's a step in the right direction.
Speaker 3:We are we are benchmark cognizant managers. They are pressing investment management and we have offerings across all of these indices. But it's it's the the the index summarization was just a natural progression and we just going to see our offerings merge, the swix and the all-share merge into into one, and that we are operationally doesn't affect us too much. But overall, when we chat to our Clients and and, in general, investors, we have a single South African equity benchmark that we can chat about. The conversations are a lot easier. It's not like oh you, are you talking about the swix of the old Z? It's more like we talking about the same South African index so remelin For the end investor.
Speaker 2:Is this no news, bad news, good news? I'm trying to get a sense because I think it's. It's a. I understand the benchmarking. So if you've got a, if you own an investment product, you want to be able to say how is this product doing relative to the market, the real South African market? So I can understand that it's nice for for fund managers to be judged, that they would say, fairly. But for me, you know, with my 10 grand a month or whatever it is that I'm, that I've got invested, is this, is this a? Is this good, bad, indifferent?
Speaker 3:Yeah, I wouldn't say it's Bad from from from the. I think it's good from the point that when you want to compare as an investor, you got your 10 grand, you want to take it and invest it somewhere and you want to compare it against different managers. They're all targeting especially in the benchmark, cognizant index, cognizant space all targeting the same thing and it's a lot easier to compare than if one five managers doing an old Z and one five managers doing a SWIX. Now the end investor has this central point of comparison, takes the thinking out of it, can just compare performance against performance if they benchmark against the exact same index.
Speaker 2:Okay, I like that, because now we're comparing apples with apples, not apples with nachis. Yeah, so I get it, thank you. So for all of our first time guests, we end up with one surprise question. So get ready. This is your surprise question. If you had to meet your 18 year old self today, what would be the one lesson you would love to kind of impart to yourself? Knowing what you know today, with the experience you have and it doesn't have to be can be an investment question, it can be a money question, can be a life question, maybe a sports question. Whatever it is that the lesson you would love to kind of impart to your younger self?
Speaker 3:I mean, the stupid answer would be invest in Bitcoin, but I think the more deep answer would be just believe in yourself and believe anything is possible, and not listen to other people's constructs or perceptions of what you can do. You can do anything you put your mind to and yeah, it's just you need to set a target and aim for it and try and act as the person you want to become now, when you're not that person yet.
Speaker 2:Fantastic. That's much better than buy a Bitcoin. I appreciate it. Thanks for Ramilin.
Speaker 3:One more quote is there's two pains in life the pain of discipline and the pain of regret, and you get to choose that pain every day.
Speaker 2:Yeah, that's deep, I must say, because a lot of the world's monetary problems, I think, are about the pain of discipline and not enduring the pain of discipline sometimes. And then they do end up with a lot of regrets and very few people actually can kind of delay the gratification, the instant gratification needs. So I think it's a power quote that I love it. Ramilin Chetty thanks so much for joining us. He's a quantitative analyst at Price and Investment Management. That was great. You took a tough subject and made it simple enough for me to understand and I appreciate your time. Thank you so much.
Speaker 3:I appreciate it.