JSE’s concentration of large shares crowds out diversification

A decline in new listings has intensified the concentration of large companies on the Johannesburg Stock Exchange (JSE), a study by the University of Cape Town's Development Policy Research Unit (DPRU) shows.

The DPRU’s study was commissioned by the Association of Savings & Investment South Africa (ASISA) to provide research-backed explanations for the local stock market’s contraction – more than 500 delistings over the past 25 years.

The delistings have left the local share market dominated by a handful of large companies with significant market capitalisation. Delisting and the rise of unlisted or private markets is a global trend that has affected many stock markets around the world, but the local study shows that the JSE has also had a decline in new listings so smaller companies lost to the exchange have not been replenished which has intensified the concentration of larger companies.

The study shows that most of the delistings from the JSE since 1989 occurred before 2005 and most companies leaving the exchange after that date have done so as a result of mergers and acquisitions, Professor Haroon Bhorat, an economics professor and the director of the DPRU, said at a recent ASISA briefing on the research.

He also found that delistings were heavily influenced by South Africa’s low economic growth and by company-specific factors such as age, size, profitability and debt levels. Many other less significant factors also contributed to the delistings, including uncertainty about government policy.

Crowded out

Bhorat and his UCT colleagues, Leigh Neethling and Ayesha Sayed, say a widely used measure, the Herfindahl-Hirschman Index (HHI), shows the concentration level of shares on the JSE have increased by around 90 percent between 2006 and 2024.

The researchers say their paper “Vanishing Acts: An Econometric Exploration of Firm Delistings in South Africa” shows that large companies not only merge with or acquire smaller ones, but smaller companies also get crowded out by dominant companies.

Bigger companies feature in leading indices and have increased liquidity, while their smaller peers face diminished investor attention, reduced access to capital and declining trading volumes, they say.

This causes a feedback loop: persistent delistings raise concentration, while concentration crowds-out smaller firms that get less access to capital.

This “crowding out” of small cap companies means fewer innovative and growth sensitive companies list on the JSE, while older larger companies remain entrenched, Bhorat and his team say. 

Rise of large managers

Share market concentration combined with the rise of large local asset managers poses potential problems for investors too, the recent Investment Forum conference hosted by the Collaborative Exchange in Cape Town and Johannesburg heard.

Gavin Wood, chief investment officer at Camissa, said at the conference that the top five shares in the capped SWIX All Share index market capitalisation, where the maximum size of the shares is capped at 12 percent, make up a third of our market.

“That's enormous. But it gets worse because the top 10 make up over half the market in terms of size. And then the top 15 make up two-thirds of the market in terms of size,” he said. The top 50 shares on the JSE make up 91 percent of the market.

Meanwhile a few local managers have grown very large - the 20 largest fund managers manage almost 90 percent of local investments and the top 15 manage more than R100 billion, a 2025 survey of asset managers published by multimanager 27Four shows.

The large fund managers are so large that their choice of shares is limited – often to just 15 to 20 shares on the JSE – because making meaningful allocations to smaller companies puts them at risk of owning the whole company.

This means that larger funds are all invested in very similar shares, because of their sizes, Wood says.

Large managers choose large shares

Wood said a medium-sized manager can have an equity portfolio that can hold many shares outside of that top 50 giving them a significant advantage over large managers, because smaller shares are often cheaper and better sources of market-beating  returns, Wood said,

If a manager has R300 billion invested in equities, there are only 48 shares on the JSE in which the manager can invest one percent of the portfolio without owning more than 10 percent of company, Wood said.

A manager with a R300 billion equity portfolio fund who wishes to invest five percent of the portfolio in each share can choose from the shares of just 16 large companies, as five percent of this size portfolio would amount to more than 10 percent of the shares in issue of any smaller companies, Wood said.

Adding to the diversification problem, the 16 largest companies are now dominated by precious metal companies, making them far riskier than in the past, he said.

Blending dilutes diversification

Typically advisers recommend blending a few large managers’ funds, but when large managers all holding the same shares are blended, the outcome is similar to choosing a passively managed index fund – but the investors are paying a high fee, Wood said.

The active share – the sum of managers’ shareholdings above or below the benchmark – is low when you combine South Africa’s four largest equity managers, but the fee remains high, Wood said.

Moves to improve listings

The JSE is not unaware of the concentration problem and is working on a number of initiatives to improve listings, Alicia Greenwood, director of JSE Clear and director of post trade services at the JSE, told the recent Financial Sector Conduct Authority conference.

She said good returns and South Africa’s removal from the Financial Action Task Force’s grey list has improved international investors’ appetite for South African investments.

There were six new listings last year, two more due soon and a “strong pipeline” for the year ahead, Greenwood said.

The JSE is involved in Operation Phumelela, an initiative that includes working with rating agencies and policymakers, to ensure the local market was attractive for both investors and companies seeking to list, she said.

The JSE had materially simplified its listing requirements without compromising the quality of listings and had introduced lower listing fees for smaller and mid-capitalisation companies, she said.

The exchange is also investing heavily in modernising its infrastructure, particularly trading and clearing systems, starting with equities and continuing to other markets over the next five years, Greenwood said.

Initiatives were targeted at high trading and algorithmic investors to improve liquidity and volume on the exchange, she added.

Greenwood said the JSE was also looking at shortening its settlement periods (when securities are received or funds paid out) from three business days after the trade to closer to the global norm of one business day after the trade.

Attracting foreign money

A fast-track listing process has also been introduced to encourage companies already listed on one of 18 other big stock exchanges to dual list on the JSE, Greenwood said.

Longer trading hours that overlap with other major markets were also discussed at the conference.

Vukile Davidson, chief director of financial markets and stability at National Treasury, said Treasury is considering future amendments to the Financial Markets Act to encourage issuers and investors. In the short-term it is working on facilitating the development of a synthetic financial centre - a regional hub for managing money in currencies beyond just the rand. According to the latest Budget Review, it is proposing asset managers be allowed to manage portfolios and trade instruments in foreign currencies in portfolios in South Africa, with a view to attracting money to the region and better managing the foreign savings of local investors.