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Free float to shake shares

THE introduction of a new system for calculating ASX indices will have major implications for some of Australia’s biggest companies.

Starting this month, ASX indices will be calculated on a free-float basis, meaning the weighting for companies will be adjusted to exclude controlling or strategic holdings.

For instance, the 29 per cent of News Corp controlled by Rupert Murdoch will be excluded when News Corp’s market capitalisation is calculated.

Similarly, the 38 per cent of Publishing and Broadcasting Ltd, controlled by Kerry Packer, will be excluded.

This change could have a profound effect because many institutions base their investment decisions around the index weighting of companies. It is expected that many institutions will reduce their holding in selected companies simply because their weighting in the S&P/ASX200 Index is being reduced.

News Corp, Rio Tinto, Woodside, Publishing and Broadcasting and Westfield Holdings will be downweighted the most, stockbroker JBWere said in a research note.

JBWere expects the largest beneficiaries will be the four major banks, along with BHP Billiton, Telstra and AMP.

These stocks will retain their 100 per cent weighting and, therefore, by default, will comprise a larger portion of the ASX indices. (Telstra has always been valued on a free-float basis, so its weighting will not change even though the Federal Government is the 51 per cent shareholder.)

The extent to which these changes, which bring Australia into line with major international markets, affect trading in specific stocks is a point of conjecture.

A close look at two WA stocks illustrates some of the factors at play.

BankWest’s free float is just 43 per cent after excluding the majority shareholding of HBOS (the merged Halifax Bank of Scotland).

However, BankWest’s weighting in the current indices has already been reduced to reflect its relatively low liquidity, and therefore it does not anticipate significant fallout.

The free float for AlintaGas is 55 per cent after excluding strategic holdings like United Energy and UitiliCorp.

Investor Relations Manager David Franklyn said the level of institutional holdings in AlintaGas was relatively small for a company of its size last December but has only recently confirmed that it will proceed.

It will commence publishing the free-float indices on April 8 and run them in parallel with current indices until the end of September. The calculation will include a special adjustment for stocks with low liquidity.

The new system will officially commence on October 1 2002.

The biggest impact will be felt by ‘index’ funds, which aim to match the returns from a chosen index, such as the S&P/ASX300 Index.

Research group Rainmaker Information estimates that 15 per cent of the Australian equities market (about $33 billion) is invested on an index basis.

In contrast to ‘index’ funds, ‘active’ funds have discretion over which stocks they hold and how much they hold.

However, in reality, many ‘active’ investment managers hold a portfolio of shares that closely tracks their preferred Index.

Director of Index Services at Standard & Poor’s, Jason Feld-mayer, said extensive consultation with Australian market participants found they were in favour of a free float methodology.

“The introduction of a free-float methodology will make the index more simple, transparent and standardised globally, which should help attract further investment, including foreign investment, into the Australian market,” Mr Feldmayer said.

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