The Johannesburg Stock Exchange (JSE), in partnership with FTSE Russell, launched eight new factor indices covering the South African equity market. The new FTSE/JSE All Share Factor Index suite enables investments with a focus on smart beta investment strategies which are built using factor indices.
“Factors” refer to different characteristics which may influence the performance of equities which share them. Factor indices are combinations of equities that meet the needs of investors wanting particular qualities from an investment in shares – such as their liquidity, volatility or yield. By contrast, traditional indices are often based on market capitalization – or the size of companies. The FTSE/JSE All Share Index, for example, assigns a larger weight to large-cap companies and a smaller weight to small-cap companies. Investment strategies which focus on factors (rather than market capitalization or sector) are referred to as smart beta strategies.
Parsons says passive investment strategies and Exchange Traded Funds (ETFs) have already experienced enormous capital inflows and now investors are moving beyond tracking indices based only on market capitalization to create passive strategies based on other factors including value, yield, volatility, liquidity, quality and momentum. “The JSE is privileged to be able to partner with industry leader FTSE Russell who can provide accurate and relevant factor indices developed through transparent and consistent methodologies.”
Factor indexes can be used both by investment managers looking for a benchmark to measure the performance of portfolios with exposure to a certain factor or as the performance target for investment products like ETFs which track a specific index.
Parsons says the new range will not only provide investors with a benchmark against which they can easily track the performance of their factor-based strategies, but can also assist investors in creating their own factor view of the market. “The JSE also offers investors the possibility of creating custom indices which can combine the individual factors in the FTSE/JSE All Share Factor Index suite according to their specific needs.”
Peter Gunthorp, Managing Director of Research & Analytics, FTSE Russell, said: “FTSE Russell has a strong and long-standing relationship with the JSE and we are delighted to extend our partnership through the creation of this new factor-based index series. The adoption of smart beta indexes continues to grow as asset owners evolve their strategies and the launch of this new series will allow the JSE to respond to that demand.”
The FTSE/JSE All Share Factor Index suite is based on FTSE Russell’s Global Factor Index offering and consists of eight indices.
The factors represent common factor characteristics for which there is a broad academic and practitioner consensus, supported by a body of empirical evidence across different geographies and time periods.