A market that keeps changing shape
Equity indices are extremely dynamic. In the 1990s, the largest companies in the S&P 500 were ExxonMobil, Philip Morris, Walmart and Coca-Cola. Today, the index is led by Nvidia, Apple, Microsoft and the rest of the technology giants. The JSE has been through a transformation every bit as dramatic. It has changed what concentration risk means, how diversification should be measured, and how South African equities should be used within a broader portfolio.
From gold to a broader market
When the modern suite of JSE indices was launched in 1978,
resources made up 68% of the All-Share Index – a faithful reflection of an economy built on mining. Over the following decades that weight fell to below 10% as financials, consumer businesses, industrial companies, listed property and rand-hedge counters became more prominent.
But this evolution has not occurred in a straight line. Resources recently rebounded to over 30% of the index, driven largely by the gold bull market. Single names have periodically dominated in ways sector labels do not capture: before the Prosus listing in 2019, Naspers alone comprised almost a quarter of the local benchmark, prompting a focus on using capped indices to mitigate this risk. The result is a market genuinely broader than its old “resources market” label, but one still capable of behaving in an episodically concentrated way whenever a specific macro or earnings theme takes hold.
Diversified, but still concentrated
Breadth at the sector level has not eliminated concentration. The ten largest shares still account for roughly half of the market, and leadership rotates within a remarkably small club: since the modern ALSI was launched in 2002, only 24 unique shares have featured in the top ten. At different times, returns were driven by precious metals, banks, Naspers/Prosus, rand hedges or domestic recovery plays.
This creates an important distinction between index performance and market breadth. A strong headline return does not always mean the average share has performed well, and a muted index can obscure attractive opportunities below the surface. For allocators, the risk is assuming broad participation when performance was actually concentrated in a handful of names.
A handful of shares does the heavy lifting
Rolling 12-month contribution to All Share return: the 5 largest shares vs the remaining ~150.
Since 2002 the top 5 – roughly 3% of the names – have delivered 42% of the index’s total return.
Concentration risk is about drivers, not sectors
More profoundly, concentration should no longer be assessed through a sector lens at all. A portfolio may look diversified across resources, financials, industrials and consumer shares, yet still carry concentrated exposure to a small number of underlying drivers: commodity prices, the rand, Chinese demand, domestic interest rates or the earnings of a few dominant constituents.
Consider a boom in Chinese consumption. It lifts not only Naspers/Prosus, at around 10% of the index through the Tencent stake, but Richemont as well. Growth in African economies benefits the banks, at more than 20% of the index, as well as the telecommunications companies, at around 6%. A strengthening rand cuts in opposite directions in a single “local” bucket: it is negative for a domestically-listed miner, but positive for a retailer or bank. Diversification therefore needs to be assessed in several dimensions at once – stock concentration, factor exposure, currency sensitivity, earnings source, macro sensitivity and the correlations between them – not just sector weights.
Fluid leadership calls for persistent anchors
If sector leadership rotates with the cycle – commodities turn, banks reprice with rates and credit, retailers track household confidence – then a purely top-down sector approach is fragile. It depends on forecasting the next phase of the cycle and timing the rotation, and it risks arriving in crowded themes after most of the return has been captured.
A more durable foundation is to focus on drivers of return that persist across cycles: quality, valuation and growth. Sector exposure should then emerge from where the best stock-level opportunities sit, rather than being imposed as the starting point.
How a systematic process puts this into practice
This is precisely what a systematic equity approach solves. The process seeks companies with strong fundamental characteristics, attractive growth prospects and valuations that offer sufficient compensation for risk. It is bottom-up, evidence-based and risk-controlled rather than anchored to a single macro or sector forecast. If resource shares screen well on quality, value and growth, exposure can rise; if financials or consumer shares offer better opportunities, the process shifts accordingly. Sector positioning is an output of the process (with relative constraints applied), not an input – which helps avoid chasing yesterday’s winners or anchoring on a preferred narrative.
The process is also not a black box. Investors can understand what the process is trying to capture, how companies are assessed, how risks are controlled and why the portfolio owns what it owns. Rules-based does not mean judgement-free: judgement is structured, consistently applied and tested against evidence. Human oversight remains essential – validating fundamental data, reviewing model behaviour, assessing liquidity and implementation risk, and challenging unintended exposures so the portfolio stays aligned with client outcomes.
The market will keep evolving
The JSE of the next decade will look different again – it always does. Investors cannot control which sector leads next, but they can control whether their process depends on predicting it. A transparent, rules-based framework anchored in persistent return drivers, with disciplined human oversight, is designed to keep compounding through those changes rather than around them. That is what the evolution of the JSE demonstrates: less confidence in labels and historical trends, more clarity about the real drivers of return. Allocators, in turn, should ensure they have the investment framework to best capture those drivers.
