Cautious entree for new index

By Nick Stride

Friday 4th October 2002

The financial community generally welcomed this week's announcement the main sharemarket index will move to a free-float basis but a few details have raised eyebrows.

"It's a move they had to take, everybody else says free float is the way to go," said Campbell Miller, a strategist at sharebroker JB Were.

"But there's an issue in the details of the construction. There are a few strange things."

The Stock Exchange has signalled wide consultation but proposes to exclude large, strategic shareholding blocks from companies' weighting on the new NZSE50 index.

This will mean blocks of 20% or larger, and blocks of 10% and larger, which collectively add up to more than 60% of a company's shares.

The exception will be companies whose "after free-float adjusted" market capitalisation is greater than $1 billion.

In that case the company's index weighting will be 80% of the value of all its shares, not just the free-float shares.

In the case of Auckland International Airport, under pure free float Auckland city council's 25.7% stake would have been removed.

On a 75% weighting of the remaining shares its market capitalisation for weighting purposes would have been $1.03 billion.

Under the exception an 80% weighting of all the shares gives it $1.48 billion.

"The impact is on Carter Holt Harvey, Contact Energy, Auckland Airport, and The Warehouse," Mr Miller said.

"It looks a bit arbitrary and there are potentially some strange effects.

"Contact and The Warehouse are now close to the threshold. If there's a fall in the share price their weighting will go down by a large amount."

However, only passive funds that track the index exactly would be obliged to buy or sell when weightings changed.

Other fund managers can choose to be overweight or underweight in a company's shares.

The exemption creates the potential for stocks to be "gamed" for instance, sold short when they are close to the exemption threshhold.

Scott St John, a director of First New Zealand Capital, said the mooted changes were "a good platform for discussion" but it was important listed companies got the opportunity to put their case.

Mr Miller said another potential issue would be the attitude of the guardians of the mammoth New Zealand Superannuation Fund.

With Telecom's 26% weighting the fund might end up with 3% to 4% of its entire portfolio in the company's stock, a position that was "not good," Mr Miller said.

"If they invent another index other fund managers may use it."

Mr St John didn't think that would be a problem.

"I'm sure the guardians of the super fund will be running a balanced approach and that they'll take all considerations into account," he said.

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