Treasure Chest: Extensive ASX Index Rebalance

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

By Greg Peel

On March 15, Standard & Poor’s will rebalance the S&P/ASX 200 index to account for quarterly market cap changes. On the same day FTSE (formerly Financial Times Stock Exchange) will transition its own Australian index from applying a free-float range to using actual free float numbers. And Vanguard will transition a number of its international exchange traded funds (ETF) from MSCI (formerly Morgan Stanley Capital International) benchmarks to FTSE benchmarks.

[Note: a “free float” refers to that amount of ordinary shares of a listed company available for trade on the exchange rather than held by a static investor(s).]

Weightings changes to the S&P/ASX and FTSE Australian indices will result in passive fund managers both onshore and offshore — and these are usually amongst the biggest holders of stock — buying and selling in line with the changes in order to maintain accurate index-tracking. While the overall impact on the indices should be zero sum or very close to it, notable impact can be felt on individual stock names.

Similarly, Vanguard’s shift from one benchmark to another will result in the ETF sponsor reweighting its fund make-up to match the new index, to the value of funds invested in the Australian ETF.

The changes will occur on March 15 and while often the big funds do wait until the death to make their own, consequent changes, others begin to move ahead of the deadline. Notably, traders will start to position ahead of the deadline in the knowledge of what is about to occur.

UBS reports that on this day, Premier Investments ((PMV)), Magellan Financial Group ((MFG)), Trade Me ((TME)) and Horizon Oil ((HZN)) will be added to the ASX 200 while Gindalbie Metals ((GBG)), Gryphon Minerals ((GRY)), Saracen Mineral Holdings ((SAR)) and Bathurst Resources ((BTU)) will be deleted.

FTSE will add Federation Centres ((FDC)) to its own Australian index.

FTSE’s change of formula to actual free float from a free-float range will imply $190m of passive two-way turnover, UBS suggests. The largest up-weights in the exercise will be Aurizon ((AZJ)), Seven West Media ((SWM)) and Fairfax Media ((FXJ)) while the largest down-weights will be Fortescue Metals ((FMG)), Crown ((CWN)) and Oil Search ((OSH)).

UBS expects the Vanguard ETF transition from MSCI to FTSE to imply $1.2bn of passive two-way turnover. The largest up-weights will be Oil Search, Fortescue Metals (note both these stocks will come under attack from both sides, up and down), and the largest down-weights will be BHP Billiton ((BHP)), Rio Tinto ((RIO)), Woolworths ((WOW)), Commonwealth Bank ((CBA)), Westpac ((WBC)), ANZ Bank ((ANZ)) and National Bank ((NAB)).

The transition will also so mean Vanguard increasing its holding in Wesfarmers partially protected shares ((WESN)) and reducing its holding in Wesfarmers ordinary shares ((WES)).

[Note: WESN shares were issued to existing shareholders of Coles when Wesfarmers acquired the company in 2007.]

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