Australian exchange runs into row over All Ordinaries Index revamp

PUBLISHED : Monday, 14 December, 1998, 12:00am
UPDATED : Monday, 14 December, 1998, 12:00am

It has been an eventful time for the Australian Stock Exchange (ASX) since its shares were listed on its own boards two months ago.

The ASX significantly upgraded its profit forecasts and watched its share price soar but it has also found itself at loggerheads with much of the country's investment community.

Fund managers, brokers and companies have been bitterly complaining about the ASX's proposed changes to its benchmark All Ordinaries Index - as well as the ASX's reluctance to consult them on the matter.

ASX managing director Richard Humphry said the exchange was 'between a rock and a hard place', with some leading fund managers wanting only the largest and most tradable stocks in the index but others calling for the inclusion of more smaller companies and less onerous liquidity requirements.

Last week, Mr Humphry, who was being pressured by some fund managers to resign, unveiled a compromise that will retain the All Ordinaries as the broad market benchmark but create two index sub-sets.

The ASX has proposed a 'stapled' index of an ASX 100 with the biggest stocks, and an ASX 250 that would have less stringent inclusion criteria in terms of market capitalisation and liquidity.

The ASX had recently pruned the market-weighted All Ordinaries, reducing its constituents to 263 stocks.

The compromise will increase the number of companies in the All Ordinaries to 350.

The ASX has more than 1,200 listed companies with a combined worth of about A$500 billion (about HK$2.4 trillion).

The 10 largest stocks, which include media group News Corp, telecommunications giant Telstra Corp and the Big Four banks, account for half of the exchange's entire market capitalisation.

Mr Humphry said: 'If you included companies whose shares rarely trade, not only would it make the index easy to manipulate with small trades, but those who use the index as a benchmark for the market would not be able to replicate it - at least not at any sensible prices - because of the shortage of stock in these companies.' He said some managers - in particular those specialising in small companies - wanted the ASX to cut the minimum capitalisation criteria from $90 million to just $20 million.

This would have resulted in about 500 companies being included in the All Ordinaries - with the smallest being 1/200th the size of the largest.

In theory, the ASX could have accommodated both groups by introducing new indices, such as an ASX 75 and an ASX 500.

Mr Humphry said 'the trouble is that both groups want their favoured index to be called the All Ordinaries'.

The All Ordinaries is vital to companies - exclusion can hurt their share price and fund-raising capability.

The boards of some of the omitted companies have apparently been examining their legal options and considering whether they could take a class action against the ASX and demand inclusion.

As part of the All Ordinaries' revamp, the exchange had also wanted to introduce a controversial annual charge on fund managers who use the index.

However, the fee plan is now on hold and will be reassessed after the release of a public consultation document on the exchange's proposed index changes next month.

The exchange was between a rock and a hard place, with some wanting only the largest and most tradable stocks in the index but others more smaller companies