While companies like FTSE International, Dow Jones, S&Pand MSCI seem to dominate the indexing industry, they are hardly the only players on the field. Among others, the world's local stock exchanges are busily producing their own new indexes - tailored to fit the needs of their specific markets. They point up the rising importance of financial indexes for all the world's investors.
The end of August was scheduled for the introduction of six new indexes for institutional investors on the Amsterdam Exchanges. The Amsterdam Exchanges All-Share Indices include dividends, are weighted by market capitalization, and will be updated quarterly. The two dominant Dutch benchmarks, the AEX and the Midkap, have 10% weighting caps on their component stocks and are revised on an annual basis.
The new group of indexes will include an all share index, a small cap index, market-capitalization-weighted versions of the Midkap and AEX indexes, and an index that excludes stocks in the Midkap and AEX indexes.
The exchange is also planning to launch a variety of sector indexes.
Deutsche Borse AG, the Frankfurt stock-exchange operator, introduced a 50-stock blue chip index for its Neuer Markt growth-stock segment on July 1. The new index is aimed at institutional investors and can support derivatives.
The index weightings will be calculated according to market capitalization and liquidity in line with the bourse's other indexes, Deutsche Borse said. The maximum weighting for a single stock will be 10%, and non-German stocks may also be included. The bourse plans to review the index's composition in March and September each year; weight-ings are to be recalculated every quarter.
The Neuer Markt, established in early 1997, is made up of 115 stocks.
On the other hand, the launch of a new index that was to have occurred this year, won't - for a while. The London Metal Exchange is postponing the launch of its base metals index, initially planned for mid-1999, until the spring of 2000, because of the threat of the so-called Y2K or millennium computer bug.
The LME has been developing an index contract, LMEX, based upon a basket of underlying primary base metals contracts, for several years.
The metals index contract will use the copper, aluminum, zinc, nickel, tin and lead contracts already traded at the LME. Analysts believe the metals index contract will provide a new alternative for funds dealing in base metal contracts.
Plans are well under way to create an index next year that combines medium-sized stocks from Belgium, Luxembourg and the Netherlands, officials at the Amsterdam Stock Exchange and Brussels Exchanges said in early August.
The officials said the index should increase the liquidity and market volume for stocks with medium-sized capitalization in the three-country region.
"There is more and more interest in pan-European shares, but that only
seems to center on blue chips. Midcaps have largely been ignored in this trend," said Vincent Van Dessel, member of the executive committee at Brussels Exchanges, which oversees the Brussels Stock Exchange. Van Dessel said stock-exchange officials from all three countries will meet again in September.
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The second quarter saw a surprising turnaround in the war between actively managed funds and index funds. The former averaged a 10.16% total return for the second quarter while the S&P 500, the index on which many passively managed funds are based, returned only 7.06%, according to fund tracker Lipper Inc. The funds based on the S&P 500 actually showed an average return of 6.85%.
Fully 68% of the actively managed stock funds beat the widely watched S&P500 benchmark in the second quarter versus 25.7% in the first quarter, according to Lipper, a unit of Britain's Reuters Group PLC. For year end 1998, that figure was at about 15%.
It is not that the average fund manager turned suddenly brilliant. Rather, stocks of all sorts delivered strong returns in the quarter - a big change from the prior market environment in which gains were concentrated in a short list of giant, fast-growing companies that dominate the S&P 500. Small caps, in particular, did quite well.
In an interesting reversal, during the second quarter the Russell 2000, the benchmark index for small stocks, out-paced the major stock-market measures. It rose 15.1%. That compares with the 9.7% gain posted by the overall Nasdaq market, the Dow Jones Industrial Average's gain of 12.1%, and the 6.7% rise posted by the S&P500.
Jeff Molitor, director of portfolio review at Vanguard Group, remained unperturbed by one quarter's reversal of a long-time trend. He said index funds will always perform well against funds that are actively managed because of their lower expenses. "Granted, active managers have a better opportunity to do well when the performance of the market is more broadly distributed," but low cost ultimately makes for higher returns, Molitor said.
The officials have drafted a list of 40 to 50 companies from a variety of sectors for the index. Van Dessel said these shares aren't included in domestic benchmark indexes like the AEX Index and the Bel-20 Index.
The National Stock Exchange of Lithuania launched a new index on April 1. The Litin-10 consists of the exchange's 10 most actively traded shares. The weightings of its components are determined, not by the usual method of market capitalization, but by liquidity. The more liquid the stock, the heavier its weighting is. The index is calculated in real time and is expected to be part of the foundation for an anticipated pan-Baltic stock exchange that will include the National Stock Exchange of Lithuania, Estonia's Tallinn Stock Exchange and Latvia's Riga Stock Exchange.
The Australian Stock Exchange Ltd. has said it is planning to revamp and add to its indexes by April of next year. The new, revised family of indexes will include an All Ordinaries Index consisting of 500 stocks weighted by market capitalization. The current ASX 100, consisting of 100 highly liquid stocks, will be included as part of the new group of indexes, which will also include an ASX 200 index and an ASX 300 index, as well as a Small Ordinaries index containing the smallest 400 stocks of the ASX 500 and the current ASX 50 which will serve as a divider between large and mid cap stocks.
The Stock Exchange, Mumbai, of India launched the BSE-500 index on July 8. Described as a broad-based index, it represents roughly 80% of BSE market capitalization and is composed of 500 stocks. Components are selected based on their market capitalization, industry classification, and trading frequency and volume. All components are required to be listed on the Mumbai Stock Exchange.
In Malaysia, the Kuala Lumpur Stock Exchange introduced the KLSE Syariah Index, or KLSE SI, on April 17. The index is designed for foreign and domestic investors who want to invest in companies that abide by the Islamic principles of Syariah, or Shariah. Over 270 stocks from Malaysia's Main Board were approved by the Syariah Advisory Council (SAC) of the Securities Commission for inclusion in the index.
For the future, new indexes are being considered in Spain and Canada.
The chairman of the Spanish stock market commission (CNMV), Juan Fernandez Armesto, has proposed the development of alternatives to Spain's benchmark index, the IBEX-35. The purpose would be to increase trading activity and liquidity: Well over half of the transactions that take place on the Spanish stock market involve only five of the companies in the IBEX-35, and over a recent 18-month period there were only 12 new listings of companies in Spain.
The Toronto Stock Exchange, having recently revamped its benchmark indexes in a joint venture with Standard & Poor's (Indexes, Issue 1, 1999), is now considering a series of sector indexes that ideally would come out by year end. Richard Carleton, the TSE's vice president of index and market data services, said they are considering sectors of the S&P/TSE indexes and businesses that are ineligible for inclusion in the benchmark indexes such as real estate investment trusts and income trusts.
"Anything that we would do, we would be working with S&Pto develop," he added.