Equities – Nothing ordinary about ASX change

Australian Stock Exchange executives are busy gathering feedback from fund managers and other users of the all ordinaries index which could result in a major shake-up of the benchmark. Stuart Engel takes a look at the ASX proposal.

The Australian Stock Exchange recently outlined plans to double the number of companies in its benchmark all ordinaries index and build a new package of sub-indices.

Under the proposal, the all ordinaries will move to 500 companies from its current 253 with the primary selection criteria being market capitalisation. Using the All Ordinaries as an umbrella index, sub-indices - likely to include an ASX 50, ASX 100, ASX 200 and ASX 300 - may be created, based on market capitalisation and liquidity.

The ASX100 and ASX200 would meet the demands of fund managers who wanted a narrow index they could replicate. The ASX 300 would cater to fund managers who wanted a broader index they could select individual stocks from and the small index would meet the wishes of the small companies desperate not to be excluded from the all ordinaries and thus institutional funds.

The expanded All Ordinaries of 500 companies will allow more than 99 per cent of domestic market value to be reflected in the umbrella index. The All Ordinaries will continue to be the ASX headline index for describing how the market has moved.

The proposal has emerged after consultation with an 11-member Index Advisory Panel representing a range of groups using the index including the Investment & Financial Services Association (IFSA) and the Association of Superannuation Funds of Australia (ASFA), fund managers, listed companies, stockbrokers, and the Sydney Futures Exchange.

In the past, a number of stakeholders have expressed concern about the usefulness of the current system. Concern was also expressed when the ASX tightened the liquidity and market capitalisation rules for the all ords because liquidity in the market had grown to about 50 per cent from only 12 per cent when the index was established.

The latest plans follows an initial consultation paper launched earlier this year which floated the idea of what the ASX called a "stapled index" of two separate indices. These indices were proposed to be large cap stocks and other stocks.

A number of index managers have expressed concern about the use of the stapled index concept, arguing that it would present an inaccurate picture of listed companies. Since the initial proposal, all mention of a stapled index has been dropped from discussion papers.

Controversy surrounding an unrelated ASX proposal has also died down. It was mooted last year that fund managers would be asked to pay about $40,000 a year for use of the All Ordinaries.

Speaking after the launch of the latest proposal, ASX managing director Richard Humphry said it was vital the all ords continued to reflect the performance of the market and be accepted by all users.

"The concept of a broad all ordinaries index together with investment benchmark sub-indices offer the market choice and flexibility to suit the range of investment styles and requirements," Humphry said.

"Our consultation focus was to achieve an appropriate index structure for the broader investment community and their different investment styles. Each wanted to use the All Ordinaries Index as the preferred benchmark.

"All groups are catered for. Importantly, the in-built flexibility of this proposal means that the all ordinaries can readily accommodate future changes in investment styles."

Humphry says the sub-indices will enable fund managers and trustees to align investment mandates with the index most suited to their needs as well as help them assess the performance of active fund managers against the set benchmark.

The detailed specifications of the new index structure are subject to further consultation but the ASX has slated its implementation for October this year. An ASX spokesperson says the ASX will not comment on the proposals until discussions with industry groups have been completed. It is expected furthre news on the changes will be made public in early July.

Humphrey says he expects the transitional process will have minimal impact on the current all ords measurement.

"The market will be given ample time before the introduction of the new package to allow any changes necessary to investment mandates," Humphry says.