Stocks shake-up in wind as NZX looks to alter indices

The New Zealand Stock Exchange is proposing some changes in methodology for its main indices this year. Photo / Brett Phibbs

The NZX is looking at changing the way it formulates its main indices, which could affect the price of some New Zealand's biggest stocks.

The stock exchange operator released a consultation document in December on the methodology used for its headline NZX-50 and NZX-10 equity indices.

The review - the first since 2003 - had been prompted by changes expected to occur in the year ahead with the expected sharemarket floats of some state-owned enterprises, the exchange said.

The proposed changes centre on the liquidity of trading in some stocks, particularly those which have big chunks of equity locked away with one or more owners.

The so-called free float - those shares that are not locked away - will become relevant under the Government's mixed ownership model, which will involve the Government retaining 51 per cent control over the state assets.

The most popular index methodology used for calculating indexed shares in overseas indices is a "pure free float" method, which subtracts strategic holdings from the total number of shares on issue to arrive at the number of indexed shares.

The consultation document focuses on the "upweight" and "downweight" and liquidity rules for the NZX-50 Index, as well as addressing the weighting rules for the NZX-10 index.

It also outlines a proposed new index, the NZX-20, which would be used as the basis for an index futures contract proposed for establishment by NZX this year.

Changes in the wind have already had an impact on Contact Energy, whose share price has dropped from $5.65 mid-way through December to $4.82 on Friday, although the drought in the south of the South Island was also playing a part in depressing the price, fund managers said.

Under the proposed changes, Contact, which is 52 per cent owned by Australia's Origin Energy, would see its weighting on the NZX-50 index fall from 9.95 per cent to 5.3 per cent to reflect the amount of stock tradeable on the open market.

Contact would be the worst-hit stock if the changes went ahead but others, such as Sky TV - which is 43.6 per cent owned by Rupert Murdoch's News Ltd - would also be affected because its weighting would drop from 5.5 per cent to around 3.4 per cent.

Index weightings can play an important part in the way stocks are priced.

Fund managers use indices as a guide to taking positions in stocks and to measure their investment performance against.

Then there are those "passive" funds that weight their investments along the same lines as the index's composition.

Such funds would have to sell down their holdings in the affected stocks, such as Contact, or risk being "overweight" in any one stock, relative to the index.

Shane Solly, at Mint Asset Management, said it was a good time for the NZX to look at how its indices were calculated. "The rules are complicated and have some subjective components to them," he said. "The fact is that the existing rules do not reflect the investment universe for investors."

Fund managers welcomed the likely revamp.

"The proposals, at the margin, probably do improve the usability of the [NZX-50] index but we are still a way off having an index that we think would describe perfectly the New Zealand asset class," said Andrew Bascand at Harbour Asset Management.

The exchange's deadline for feedback is Thursday.

UNDER REVIEW

* The NZX is looking at how it composes its indexes before the Government starts to partially privatise some state assets later this year.

* The changes would give more consideration to how much of a stock is available for trading and how much is locked away with big owners.

* The changes would affect how the stocks are weighted on the index and in turn how they are priced.

* The NZX is also proposing a new index - the NZX-20 - which would be used as the basis for an index futures contract.