Last week, Philippine stocks suffered a beating following a sharp decline in the stock price of SM Investments Corp. (SM), a large conglomerate with market capitalization of more than P641 billion. A big price fluctuation in such a large company would no doubt lead to a big movement in the Philippine stock market. And we saw this happen last week.
But why? What explains the sudden price drop of SM that led to an overall decline in the prices of Philippine stocks?
The culprit is, to put it simply, the rebalancing in weights of a global index tracked by foreign institutional investors.
The subject index is the MSCI Philippines Index, a basket of 18 PSE-listed stocks that “measures the performance of the large and mid cap segments of the Philippine market”.
The MSCI Philippine Index is developed and monitored by MSCI Inc., a global provider of investment decision support tools. According to their official website, more than 7,500 institutional clients around the world use their tools as guide in managing investment portfolios.
One can then expect that a change in the composition of the index would also lead to a rebalancing of stocks held by an institutional fund’s portfolio. If, for example, a foreign fund has a mandate to follow, to the letter, the composition of the MSCI Philippines Index, it would dump stocks that were removed from or reduced in weight in the index.
And that’s what happened with SM last week.
On Thursday, August 15, it was announced that SM’s weight in the MSCI Philippine Index has been reduced from 15.87% to 12.38%. In addition, SM’s weight in another index, the MSCI Emerging Market Index, is also to be reduced.
The changes in the index composition is to take effect starting September 2, but you can expect foreign investors to start rebalancing their portfolios now by selling their SM shares.
On Thursday last week, we witnessed a sell-off in SM stocks, with the stock losing 7.73% in just one day, to close at P805.50 that day. The PSE index was dragged down, closing at 6,580.71, down 1.14%.
We are still looking for the complete list of the latest rebalanced MSCI Philippine Index, but for now, what we got is the MSCI Philippine Index composition as of May to July 2013. We will post here the August to October 2013 composition once we have found a complete copy.
Composition of MSCI Philippines Index, as of May-July 2013
The MSCI Philippines Index is reviewed and rebalanced, if needed, four times a year — in February, May, August and November.
How useful is the MSCI Philippines Index?
We compared the annual performance of the 30-company Philippine Stock Exchange index (PSEi) with the annual returns of the MSCI Philippines Index. It looks like the MSCI index, on average, has been beating the PSEi.
Such good performance apparently explains why thousands of clients around the world follow the MSCI indices and their proposed stock composition.
Here’s a graph comparing the 2006-2012 PSEi and MSCI Philippine Index returns.
Annual Returns of PSEi vs. MSCI Philippines Index, 2006-2012
Here is also a table summarizing the gross returns of two MSCI indices — the MSCI Philippines Index and the MSCI Emerging Index as of the end of July 31, 2013.
Compare this with the returns of Mutual Funds in the Philippines and one can surmise that the MSCI index performances are at par with the returns of the above-average mutual fund performers.
MSCI Philippines and Emerging Market Indices — YTD, 1-Year, 3-Year, 5-Year Returns
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