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Delistings crisis not only the JSE’s fault; investmen...

Defend Truth

Opinionista

Investment institutions and state policymakers must share blame for JSE delistings crisis

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Paul Miller is a mining financier and consultant with AmaranthCX. He is currently working on a project to find a way to reconnect retail investors with companies outside the top 100 listed companies.

We should all encourage the JSE to make itself more attractive to new listings, but we should also consider the negative role played by the policymakers in the National Treasury and the lobbyists that seem to have the National Treasury in the thrall of SA’s largest investment institutions.

The JSE released its financial results on Tuesday, which were self-described as a “resilient financial performance under challenging conditions”, but also revealed that 25 companies had delisted from the JSE in 2021, with just seven new listings in the same period. 

The results release was unfortunately timed, as it coincided with the news that investor favourite PSG Group was throwing in the towel by unbundling all its listed investments and delisting from the JSE. This is the 20th delisting already announced and expected to be completed this year. 

This news was picked up by the business press and described as part of an ongoing existential threat to the JSE. This might well be true, unlike some of the old shibboleths that were again hauled out. Such as: this delisting crisis is all the JSE’s fault and they must fix it; there is far too much red tape; being listed is too expensive; it is all just cyclical and if only prices were higher more companies would flood on to the exchange. 

How about also considering that almost all South African investing has now been “institutionalised” by design? This is to the obvious benefit of the members of that very effective lobbying group, the Association for Savings and Investment South Africa (Asisa) and to the disadvantage of all companies outside the largest 80 companies, measured by size and liquidity. 

It is also worth considering that:

  • The economics of personal stockbroking have collapsed and many stockbrokers have spent the last decade morphing into Financial and Intermediary Services Act-regulated wealth managers, which has involved moving their wealthiest clients into institutional funds and the rest on to no-service, no-advice, secondary trading-only digital platforms.
  • An ever-increasing proportion of investing is now index-linked or index-benchmarked, to the obvious exclusion of the majority of listed companies.
  • The discrimination inherent in the tax treatment of collective investment schemes relative to personal stock portfolios massively advantages large institutions at the expense of direct investors and serves to choke smaller companies off from access to the capital provided by direct investors.
  • Tax-free savings accounts were meant to incentivise saving, but the benefit of the incentive has been disproportionately captured by the large institutions that are required to manage these funds, since self-managed stock portfolios were deliberately excluded from the product design.
  • A liquidity mismatch was designed into collective investment schemes.

The Financial Sector Conduct Authority requires collective investment schemes to repurchase retail investor units for cash within 24 hours, meaning these funds are perpetually in danger of being caught short on their own units and long on the market. Any investment position that may take a week or two to trade out of is instantly excluded from consideration. Again, advancing the large at the expense of the small. 

The larger individual funds get, the more negative this size effect is on the overall market. Ninety percent of all funds in South Africa are managed by just 11 asset management houses, which means that most money, despite the huge number of individual funds, is in the hands of relatively few. Any holding which is less than 1% of the fund is immaterial, but could well be greater than 10% of the market capitalisation of even quite a large company, putting that company outside the fund’s mandate. The larger an individual fund gets the more companies drop out of its investable universe. 

Sure, the JSE must be encouraged to cut red tape, but not one of these things is in the control of the JSE. And yet all contribute to companies leaving the exchange. 

We should all encourage the JSE to make itself more attractive to new listings, but we should also consider the negative role played by the policymakers in the National Treasury and the lobbyists that seem to have the National Treasury in the thrall of SA’s largest investment institutions. 

Companies are delisting; it is self-evident that smaller companies need a diversity of smaller investors, which the National Treasury and Asisa would far prefer should only invest via institutional asset managers, which by design don’t invest in smaller companies. This damages the very public markets on which we all depend. The solution to the problem does not lie in the hands of the JSE alone. DM/BM

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  • Basically this is all good for real investors.

    Outside of JSE one can invest in projects and companies at significantly better terms. There is literally no point to be being listed at less thanR5b market cap unless you need to issue shares for cash or buy a lot of other companies. The fun damager do not have the bandwidth to deal with “difficult” companies. They can deal with the big boys but cannot deal with a growth company. When they encounter a growth company they overshoot because they have the same spreadsheets and can not walk into a real business and differentiate fact from fiction/spreadsheet.

    Pensioners have no idea what they are actually entrusting their assets to.

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