JSE Discontinues Rafi 40 Index: Funds Transition Benchmarks

• The Johannesburg Stock Exchange has discontinued the Research Affiliates Fundamentals Indexation (Rafi) 40 index.
• This change prompted funds like the Satrix Rafi 40 ETF and Old Mutual Rafi 40 unit trust to adopt new benchmarks.
• Satrix transitioned to the Rafi Fundamental Select South Africa 40 Index, with implementation having occurred on July 20, 2026.
• Old Mutual continues to track the FTSE/JSE RAFI 40 Index, having reviewed alternatives for a new index.
• The shift underscores a move from market-cap weighting to fundamental economic footprint, influencing investment strategies towards value.

Legal professionals advising on investment funds or wealth management in South Africa must understand the implications of these new index methodologies on client portfolios.

The Johannesburg Stock Exchange (JSE) recently announced the discontinuation of the Research Affiliates Fundamentals Indexation (Rafi) 40 index, following the conclusion of its agreement with Research Affiliates at the end of August. This decision has compelled various index funds to seek and adopt new benchmarks for their investment strategies.

Among the affected entities, the Sanlam-owned Satrix Rafi 40 ETF informed its investors in June about a forthcoming benchmark change. The fund transitioned from tracking the FTSE/JSE Rafi 40 (J260) Index to the newly designated Rafi Fundamental Select South Africa 40 Index. This change was implemented on July 20, 2026, and also involved a slight adjustment to the ETF's investment policy and a revaluation of its shares on the effective date to ensure fairness for investors. Similarly, Old Mutual utilized this development as an opportunity to comprehensively review fundamentally weighted alternatives for its Old Mutual Rafi 40 unit trust. The firm continues to track the FTSE/JSE RAFI 40 Index, while having reviewed alternatives for a new index.

The fundamental distinction between the discontinued Rafi 40 index and traditional market-capitalization-weighted indices, such as the widely tracked JSE Top 40, lies in their approach to company weighting. While the JSE Top 40 assigns greater influence to companies with higher market values, leading to significant dominance by large entities like Naspers and Prosus, the Rafi 40 methodology prioritizes a company's actual economic footprint. This is determined by a composite of fundamental measures including sales, cash flow, dividends, and book value, rather than merely its share price.

The Research Affiliates Fundamental Indexation approach employs five years of financial data to rank companies, a technique designed to mitigate the risk of overexposure to a few overhyped stocks that might disproportionately influence a market-cap-weighted index. This method ensures that a company's weight in the index genuinely reflects its underlying business strength. Furthermore, newer iterations of this methodology introduce even greater refinement, for instance, by adjusting cash flow to account for research and development expenditures and incorporating share buybacks alongside dividends, thereby more accurately capturing value, especially for companies with less conventional profit profiles.

The differing construction methodologies between the JSE Top 40 index and the Rafi 40 index naturally lead to divergent investment strategies. The JSE Top 40, which is extensively used by a majority of investors and fund managers as a performance benchmark and a starting point for portfolio construction, inherently reflects market momentum and company size. Funds tracking this index effectively adopt a momentum-driven strategy, benefiting from the upward trajectory of larger, often more established, market leaders.

In contrast, the Rafi 40 index, with its emphasis on fundamental economic indicators rather than market price, cultivates an investment strategy distinctly biased towards value investing. This approach seeks to identify and invest in companies whose market price may not fully reflect their intrinsic economic worth, offering a different risk-reward profile compared to market-cap-weighted benchmarks. The transition away from the original Rafi 40 therefore necessitates a careful re-evaluation of investment objectives and alignment with the new index's underlying philosophy.

The shift in index methodologies carries significant implications for the South Africa investment fund landscape. Legal professionals advising on investment funds or wealth management in South Africa must understand the implications of these new index methodologies on client portfolios. This includes ensuring strict compliance with updated fund mandates and fulfilling accurate disclosure requirements to investors regarding the fundamental shift in investment strategy and its potential impact on their holdings.

Legal professionals advising on investment funds or wealth management in South Africa must understand the implications of these new index methodologies on client portfolios. This includes ensuring compliance with updated fund mandates and accurate disclosure requirements to investors regarding the shift in investment strategy.

Source: Original reporting via Moneyweb