Top companies turfed from ASX passive index

By Nicholas Bryant

Friday 24th March 2000

The share prices of Telecom and Fletcher Challenge suffered this week as a result of their exclusion from the new benchmark indices for the Australian Stock Exchange.

Telecom and Fletcher Challenge target shares will be excluded from the joint Australian Stock Exchange (ASX) and rating agency Standard & Poor's (S&P) benchmark indices being launched on April 3. The move is a blow to both companies.

The indices chart investment for passive funds, which account for only a small portion of total ASX investment, but they are closely followed by active investors.

Last week's announcement had an immediate impact as Australian investors dumped huge numbers of both company's shares.

Telecom lost 35Ac in three days from a Monday opening of 688Ac. All four FCL letter stocks suffered, the worst being Fletcher Energy which took a 15% bath, dropping 55Ac in three days. Both have since recovered to an extent.

Telecom fared better as investors reacted favourably this week to news its majority-owned AAPT asset was advancing merger talks with AOL.

Passive funds, which invest in a company on an index based on that company's percentage of market capitalisation relative to the whole group, represent only about 7% of money invested on the ASX, but their power is greater than the numbers suggest.

There is about $A25 billion invested in passive funds in Australia. Telecom represented about 0.5% of the All Ordinaries Index making it large and liquid enough to be included in passive funds.

That means passive funds will sell about $A125 million worth of Telecom stock as the telco will no longer fit the criteria for the funds to invest in it.

They do not have to unload the stock until April 3 but brokers said about 50% of the Telecom stock was probably unloaded last week.

Lion Nathan, rumoured to be moving its head office to Australia, is the only New Zealand domiciled company which remains on the ASX/S&P indices.

Others with domestic links are Brierley Investments, based in Singapore, and Nufarm, formerly Fernz Corporation, based in Melbourne.

The indices, to be known as the ASX/S&P 100, 200 and 300, have been timed for their April 3 launch as the ASX All Ordinaries Index shifts from its present 251 companies to 500 on that day.

Inclusion on the All Ordinaries, like the NZSE, is based solely on market capitalisation.

The indices are closely tracked by investment managers and the larger managed funds such as AMP have significant portions of their money indexed, which could have an effect in support of the stock.

"When companies enter an index their share price tends to go up and when they exit it tends to go down, whether the effects are long term or transitional depends on the company," Richard James of New Zealand Funds Management said.

Under new eligibility rules it was not only lack of market capitalisation but lack of liquidity that turfed Telecom and Fletchers from the lists.

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