Proposed index changes stir controversy
The New Zealand Stock Exchange’s proposed reform of its indicies is proving controversial, as Jenny Ruth reports.
Tuesday, October 22nd 2002, 12:00AM
by Jenny Ruth
Possibly the most controversial aspect of the New Zealand Stock Exchange’s proposed reform of its indicies is that heavyweight Telecom will have an even greater weighting in the new Top 50 index than it does in the current Top 40.
Its weighting will rise from Telecom’s weighting will go from 21.74% of the Top 40 to 25.97% of the Top 50.
Fund managers are divided as to what to do about this, some thinking it’s a fundamental problem of the New Zealand market which can only be solved by getting more large companies to list and others calling for Telecom’s weighting to be capped.
Craig Brown of Walker Capital Management holds the former view. "We just don’t have enough companies. We can play around with the indicies, but really going forward we need to encourage more companies to come to the market. You can try to alter perceptions, which is probably a step in the right direction, but we’ve still got some fundamental problems," Brown says.
But John Mellor at AMP Henderson thinks all the big stocks should be capped at a maximum 5% weighting. That would also reduce Carter Holt Harvey’s weighting from its proposed 6.42% weighting and keep a lid on Contact Energy and Lion Nathan’s proposed 5% weighting each – under the new rule, the Australian domiciled Lion would be capped at 5% in any case.
Mellor argues that the exchanges in Norway and Canada publish indicies capping companies at a maximum 10% weighting, although they also produce market weighted indicies too.
Another suggestion from JB Were is that rather than being arbitrarily capped at 5% weightings, Australian companies that operate in New Zealand could be included on the basis of their sales here, thus diluting Telecom’s influence.
Were’s Hayden Griffiths says a lot more Australian companies would then be included in the Top 50, including stocks such as Australia’s Foodland which actually has more operations here than in Australia – Foodlands owns the Farmers, Foodtown and Woolworths chains in New Zealand.
"There’s more revenue generated by Australian listed companies in New Zealand than by domestic companies," Griffiths says.
Also controversial is the move to make the Top 50 a gross index, measuring both share price movements and dividends. The intent is to change perceptions of how well the New Zealand market has performed in recent years.
As the exchange says, New Zealand companies are the world’s fifth highest payers of dividends and that means using a capital index (which only measures actual rises or falls in share prices) excludes a chunky amount of the actual returns to shareholders.
The numbers tell the story: between 31 December, 1991 and last Friday, the capital index had gained only 33%, from 1505 points to 2006. The gross index was up 157%, from 1563 points to 4017.
Critics of the move say that will make it difficult to compare New Zealand with major countries, all of which use capital indicies.
The decision to include another 10 stocks, in an attempt to increase analysis and attention on them, finds favour with few fund managers. Collectively these 10 will account for just 4.6% of the total index, adding a lot of extra work for index huggers for small returns and because they’re less liquid, are harder for fund managers to buy and sell in any meaningful quantity.
The smaller companies which aren’t in the Top 40 but which will be in the Top 50 include Briscoes, Cavalier, Michael Hill, Restaurant Brands and Wrightson.
One proposed change has won near universal approval such as the proposed move to base each company’s weighting on the amount of its "free float," shares not tied up in the hands of major shareholders.
At the moment, index participation is based on market capitalisation and the anomalous situation which developed in April when Air New Zealand rejoined the benchmark Top 40 index is widely viewed as the catalyst for the changes.
It was the seventh largest stock in the index and fund managers who benchmark their performance against that index and passive funds based on it were forced to buy Air New Zealand shares. That was even though only about 8% of the shares weren’t tied up in the hands of the major shareholders, the government, Brierley and Singapore Airlines.
Air New Zealand shares rose from 33 cents to as high as 76 cents, well above even the most wildly optimistic analyst’s valuation. The government paid 24 cents a share for its stake.
Under the proposed changes, Air New Zealand’s weighting will go from 3.67% in the current index to 1.13%.
"We agree with the objectives of the stock exchange. They want to create a better, more investible index," Mellor says.
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