20 Mar 2012

Stock exchange operator to change calculation method

6:59 pm on 20 March 2012

The stock exchange operator will change the way it calculates the value of listed companies on equity indices, moving to a pure free float model which is used commonly overseas.

The stock market currently operates a modified free float measure, but after consulting with interested parties, liquidity, or how freely the shares are traded, will mainly determine the value of the stock.

The change will take place in mid-June.

Using the March review as a guide, Fletcher Building and Telecom will remain the top two stocks and increase their weighting under the new rules, due to their open registers.

But Contact Energy, which is 51% owned by Australia's Origin Energy, will fall from third to fifth and its market capitalisation more than halve to $1.65 billion.

The overall value of the NZX 50 index will drop 8% in this example.

There will be an additional test that means only stock that trade 2.5% of the company's average market capitalisation in a six-month period will pass the test.

Under this test, strategic holdings of more than 20% will be excluded from the average market capitalisation.

A new NZX 20 index will also start later in April.

Change will benefit investors, fund manager says

Executive director at Milford Asset Management Brian Gaynor says the change in the way the market is calculated will benefit investors by giving a more realistic picture of a stock's liquidity.

He told Evening Business on Checkpoint the weightings under the current system were "not really realistic" and the change will overcome that.

Mr Gaynor cites the example of Contact Energy.

"Contact Energy had a weighting of 8.7% but it was a fairly liquid stock on the sharemarket mainly because Origin Energy owns just over 50%. It's going to move now back down to 4.6% from 8.7% and I think that's a much more realistic weighting."