Portfolio implications of JSE de-listings

Morningstar debates Market Concentration and Investment Portfolios due to JSE de-listings.

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The increased number of companies de-listing from the JSE has elevated investor concerns about the investment outlook for SA Equities. The shortage of new listings, the relatively weak performance of local shares and depressed levels of business confidence have further exacerbated fears among market participants. While the de-listing trend is concerning, the debate is less about the number of de-listings and more about the level of market concentration and its impact on investment portfolios.

De-listings have had minimal impact on JSE trading and liquidity given the high levels of index concentration and size of the main index constituents. The direct impact of smaller companies exiting the market is also less meaningful when viewed through the lens of how equity funds are currently constructed.

Most of the companies that have de-listed were not core holdings in benchmark cognisant domestic equity portfolios. Approximately 70% of de-listings over the last five years would be categorised as small-cap or fledgling companies with market caps of less than R300-million, placing them outside the investable universe of fund managers tracking the index. There are exceptions but, on average, domestic equity funds holding the majority of pension and retirement assets have remained unaffected by the shrinking opportunity set. In aggregate, investors have already been allocating capital as if the market is narrower than it is.

Sean Neethling, Head of Investment at Morningstar South Africa
Sean Neethling, Head of Investment at Morningstar South Africa