Indices provide standards against which the portfolio performance can be measured
objectively as they are a reflection of aggregate share price movements, both across
the whole market and the different sectors.
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Interpreting Indices
Indices are either "weighted" or "unweighted". This means they either give more weight to
key sectors, weight according to market capitalisation, or use a simple arithmetic average.
The JSE All Share index is weighted according to market capitalisation.
Indexes either include or exclude dividends. It is more common to include dividends.
The JSE All Share index excludes dividends. This should be taken into account when
comparing unit trust performance with the All Share index.
There are over 3 000 indices in use around the world. They can be divided into three main types.
Market indices
These cover the equity and bond markets of the world and would include the JSE indices in
South Africa, the FTSE indices in the United Kingdom, the Dow and the Standard and Poor
indices in the United States. They also include the sector indices and are designed to
reflect increases and decreases in the capital value of the underlying markets.
Third Party indices
These are calculated specifically to provide a benchmark for performance comparisons.
A South African example would be the BR-ING indices, which aim to compare
equity-based "like with like" on the JSE.
Economic indicators
These include money market rates, mortgage bond rates and inflation indices such as the CPI(Consumer Price Index).
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South African Indices
The Actuarial Society and the JSE were jointly responsible for the introduction of the
indices in use in the Johannesburg Stock Exchange and the South African Bond Exchange.
Sector indices were introduced in order to measure performance of shares affected
by similar broad economic developments.
The JSE All Share index is the weighted average rate of return of all the shares
listed on the JSE. This index is skewed in favour of mining and commodity stocks
(about 40% of the market cap of the JSE is represented in this sector).
There are 58 other sector or sub sector indices. Some sector indices represent
the shares in a particular sector, as defined by the JSE. An example of such
an index might be the Financial and Industrial Index, which reflects the
aggregate performance of the financial and industrial sectors. Other sector
indices represent a group of shares as defined by the size of the company.
An example of this type would be the mid-cap or small-cap indices.
The ALSI 40 index belongs to a third category, which defines shares
according to their relative size, either overall or in a particular sector.
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Some unit trust funds do not have an appropriate index. In these cases the fund
managers compare their performance with the median or average performance of
funds in their peer group.
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