Ethel Hazelhurst
Changes to the way the JSE calculates its FTSE/JSE Africa index series will be implemented from the close of business today. The new methodology will affect all investments that track an index, including unit trusts, exchange-traded funds and institutional funds, as well as index derivatives products.
The switch was likely to trigger large trading volumes as portfolios were repositioned, Jannie Immelman, the JSE’s head of information services, said. “The JSE’s quarterly index review normally creates a portfolio churn of around 0.9 percent for the Top40 index trackers, but this review could result in a higher than normal churn.”
The indices will now be constructed according to an actual free float instead of a banded free float. The banded free float classified companies according to what percentage of their shares was available for trading.
Immelman said while the banded structure had worked well for the past 10 years, a relatively small change in a company’s free float could result in a significant move between bands.
The large moves had the potential to cause a short-term liquidity squeeze, he said, because providers tracking an index would suddenly have to dramatically increase their holdings in that company.
“They would be competing with all other providers to buy shares in a very short time and there may not be enough shares available. Conversely, if a company’s free float figure dropped from 30 percent to 15 percent all providers would need to sell these shares in a short period of time and there may not be enough buyers to purchase these shares.”
To avoid this situation the new methodology will measure actual free float, rounded up to the next 1 percent. “Furthermore, a 3 percent buffer will apply, which means that the free float figure for a constituent will only be adjusted if the move in free float is larger than 3 percent,” Immelman said.
“This change will improve the market representation of the indices and potentially reduce large changes to constituent weights. An additional advantage is that free float data available to investors will be significantly more precise,” he said.
The change to the methodology is in line with a global index methodology change applied by the FTSE.