Changes to Stock Exchange Indexes

Monthly Statistical Bulletin Feature Articles

On Monday 3 April 2000, the Australian Stock Exchange (ASX), in a joint venture with Standard and Poor's (S&P), introduced a range of new stock market performance indexes.

The significant changes have been to redefine the All Ordinaries Index (AOI) and to provide new indexes based upon market capitalisation and liquidity.

Changes to All Ordinaries

In the September 1996 edition of this publication, a feature article was published on the AOI. The article explained how a company's inclusion in the index was predominantly based upon its market capitalisation in relation to a set of standards. As a consequence, the number of companies comprising the AOI has varied over time between 229 and 330.

At the end of March 2000, the AOI comprised 251 stocks and accounted for 90 per cent of the capital value of the stock market.

Under the new regime, the AOI is comprised of the top 500 stocks (representing 98-99 per cent of the market) based solely upon market capitalisation.

It now mainly measures the price performance of the stock market and, because of its increased coverage, can only be considered a headline index. Its unsuitability for benchmarking, due to this increased coverage, has required the construction of new indexes.

New Indexes

In total, six new benchmarking indexes(1) have been created to match the different needs of the various types of investors. These indexes differ by the number of stocks that are included and use market capitalisation with an adjustment for liquidity as the basis for determining eligible stocks.

To replace the benchmarking function of the old AOI, two indexes in particular have been produced. These are the S&P/ASX 200 and S&P/ASX 300 and comprise the top 200 and top 300 companies respectively.

S&P/ASX 200 and S&P/ASX 300

The S&P/ASX 200 index is provided for investors who are looking for a portfolio with sufficient market capitalisation and liquidity to ensure relative ease of purchase or sale. The 200 included companies account for approximately 91 per cent of the market.

The S&P/ASX 300 index includes the companies in the S&P/ASX 200 index and a further 100 companies. The extra 100 companies accounting for about 2 per cent of the market.

This index includes more smaller companies than the S&P/ASX 200 index and is therefore a broader benchmark. It is considered by the ASX to be at the limits for use by institutional investors.

Reviews of the Indexes

The ASX and S&P joint venture should ensure the new raft of indexes will remain unchanged for at least three years.

However, the (headline and benchmark) indexes will be reviewed quarterly. This review will assess the composition of each index. Since the number of companies included in an index is fixed, the addition of a company to an index will result in another company being excluded.

The results of the next review will take effect from 1 July 2000.

Which Index Replaces the AOI

The S&P/ASX 200 index has been widely promoted as the new institutional benchmark and is expected to become the benchmark for the futures market.

Fund managers and index managers, however, seem to be leaning towards the S&P/ASX 300 index.

MESI Table 5.5

In previous editions of MESI, this table has shown only the AOI. However, with the AOI now becoming a headline index, a benchmark index in the form of the S&P/ASX 200 index will also be shown.

These are the S&P/ASX 300, S&P/ASX 200, S&P/ASX 100, S&P/ASX 50, S&P/ASX 20 and S&P/ASX Small Ordinaries indexes.

This feature was prepared by Stephen Barber


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