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J257 is the Johannesburg Stock Exchange (JSE) code for the FTSE/JSE: AFR SA Industrial, one of the JSE’s three main sectors. The main sectors are Resources (J258), Financials (J580) and Industrials (J257). The sector classification is based on the Industry Classification Benchmark (ICB). Industrials can be defined as all of the JSE listed companies that do not belong to Financials, Oil & Gas Producers and Mining (jse.co.za, 2015). Resources can be defined as the JSE listed companies that belong to Oil & Gas Producers and Mining. Financials are the JSE listed companies that belong to the Financials industry.

The Industrial sector is currently the most represented sector on the JSE in terms of market capitalisation - the total market value of the outstanding shares of the listed companies on the JSE - and number of constituents, the number of stocks that make up the index. The All Share Index (ALSI) has 170 constituents and 53% (90) of those constituents are Industrials. Therefore the sector is the most represented in the overall index in terms of the number of counters. J257’s market capitalisation is 66% of the All Share Index’s market cap while Financials and Resources are 23% and 11% respectively as at 30 September 2015.

The movement on the ALSI is highly explained by Industrials as it has a greater representation in terms of number of counters and market cap. This is evident from graph 1 below, which shows the market movements of the ALSI, Financials, Resources and Industrials over the last 10 years to September 2015. This was not the case before 2008. The indices moved closely together before 2008 with Resources mostly explaining the performance of the ALSI. As at 30 September 2008, there were 41 constituents in the top 40 of which 17 (41%) were Industrials, 13 (32%) were Financials and 11 (27%) were Resources. The market cap representation was as follows: Resources had the most representation at 49% followed by Industrials at 33% and Financials at 18%. This has drastically changed since the 2008/2009 Global Financial Crisis and later, the labour strikes in the mining industry which started in 2012.

The J257 is a highly concentrated index with the top 10 companies constituting 74% of the total market cap. The top five companies make up 57% while the top three companies make up about 45% of the market cap as at 30 September 2015 - these three giants are SABMiller at 17.2%, Naspers at 15.8% and Richemont at 12.1%. The top 18 represent 85% of the total market cap. After the top 18, the remaining 72 companies contribute less than 1 percent to the total market cap of the J257 index.

 
Graph 1: The returns of the ALSI, Industrials, Financials and Resources Source

Industrials constitute the highest representation on the ALSI, however, there are only five ASISA South African Equity Industrial specialist unit trust funds. The oldest fund in this category, the SIM Industrial Fund, managed by Andrew Kingston and Marlo Scholtz dates back to 1966 and the youngest fund, the STANLIB Industrial Fund, managed by Theo Botha, was founded in 1992. The three other funds, the Coronation Industrial, managed by Dirk Kotze and Sarah-Jane Alexander, Momentum Industrial, managed by Nicole Agar and Leon Michaelides, and Old Mutual Industrial, managed by Brian Pyle, were all founded in 1998. The biggest fund in terms of assets under management (AUM) is the SIM Industrial Fund at R1.7 billion followed by the Coronation Industrial Fund at R1.5 billion. Four of these funds have above R1 billion AUM with the exception of the Momentum Industrial fund at R101 million.

Table 1: Industrial funds - top 10 counters

 

These funds are mostly benchmark cognisant, reflected through significant holdings of the benchmark heavyweights such as Naspers, Richemont, Steinhoff and British American Tobacco. Even though they are benchmark cognisant, they differ somewhat from the benchmark. Their top 10 holdings do not exactly mimic that of the benchmark. At present, all the funds are underweight Naspers, with the Momentum fund the heaviest weighted at 15.16% compared to the benchmark weight of 15.8% as at 30 September 2015. Only three funds have SABMiller, benchmarked at 17.2%, in their top 10 holdings and all of these holdings are below 7% with SIM Industrial the highest at 6.52% and Coronation Industrial the lowest at 5.4%. Four of the funds held MTN in their top 10 with the exception of the Old Mutual Industrial Fund. Of these funds, STANLIB Industrial was the only fund that was overweight MTN at 8.48% compared to the benchmark weight of 7%. The top 10 holdings of the Industrial funds account for more than 60% of the funds’ AUM, with the Momentum fund having the highest concentration at 73.5%, compared to the benchmark top 10 at 74%.

Looking at the top 10 counters of the J257 and the five industrial funds, it is evident that the managers do not just follow the benchmark but make active calls by including smaller counters in their top 10 holdings.

References:
http://www.jse.co.za/services/market-data/indices/ftse-jse-africa-index-series/sa-sector
INET Bridge, SIM, Stanlib, Coronation, Momentum and Old Mutual

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