Webster’s dictionary defines the word benchmark as ‘something that serves as a standard by which others may be measured or judged’. Healthy capital markets are dependent on good benchmarks, and the JSE places great importance on prioritising this function.

‘Benchmark weighting matters. Many managers follow a “benchmark-cognisant” approach to asset selection and will use the benchmark weighting as their default allocation before over-weighting those stocks they identify as likely future winners, and underweighting those they expect to underperform,’ says Mark Randall, Director of Information Services at the JSE.

‘The JSE, together with our index partner FTSE, publish the key equity market performance benchmarks in SA – the FTSE/JSE All Share Index and the FTSE/JSE SWIX All Share Index,’ he adds. ‘From 2004 we have published these two variants with the same underlying purpose – a broad performance benchmark for the general equity market in SA. Over time, the differentiation between the two indices has steadily diminished, resulting in only a few stocks that are treated differently in the two benchmarks.’

In March 2024, the JSE aligned the methodologies and now both indices have identical constituents and weightings – and, therefore, identical performance returns.

‘This is a project that was initiated by FTSE/JSE through client consultations commencing in 2019. The project will ultimately collapse the vanilla indices and SWIX indices into one set of benchmarks, significantly simplifying the current benchmark complexity and overlap, and centralising liquidity.’

Randall says the majority of domestic managers have already shifted their performance benchmark to the Capped SWIX All Share Index, even before harmonisation, indicating a broad preference for the SWIX weighting methodology over the vanilla All Share weighting methodology.

However, he says the exchange has seen liquidity in listed derivative contracts remain with the All Share methodology, effectively creating a split in liquidity.

‘Having to choose between two different benchmarks creates unnecessary “noise” in the system for no real benefit. Collapsing into a single benchmark solidifies the concept of one standard market metric, allowing more attention to be paid to the investment strategy without being distracted by the choice of benchmark. By not offering both a SWIX variant and a vanilla variant in the listed derivative market, we hope to centralise liquidity into a single contract rather than having it split over multiple contracts. This will improve market quality, allow better execution and build additional liquidity in its own right.’

Randall says the index harmonisation project compares well with global best practice. ‘It is typical for any given market to have one de facto benchmark that is primarily used by most participants. Harmonisation brings SA in line with this approach by removing the dual benchmark paradigm.

‘At the same time, the SWIX methodology includes elements that are unique to South Africa and reflect the nuances of the local market and the domestic investor. We intend to terminate all the indices that use “SWIX” in their name; these are now legacy benchmarks. Clients that use the SWIX indices will need to change their performance benchmark to the All Share variant. We will announce the final termination date before the end of 2024, once we have consulted with clients for any unknown impacts,’ he says. ‘The JSE, together with its index partner FTSE Russell, prioritises meaningful consultation when implementing benchmark changes.

‘Benchmarks are widely used by many stakeholders and this is one of the reasons that drive the long consultation periods and lengthy notice periods when making methodology changes. In this regard, JSE and FTSE will generally communicate directly with subscribing clients to the indices, but all consultations are publicly distributed and comment is open to asset managers, investors and listed companies.’

By Patrick Farrell
Image: Gallo/Getty Images