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Headaches and opportunities from index changes

Changes in the composition of the New Zealand Stock Exchange Top 10 index are likely to provide opportunities for share traders and headaches for some index funds.

Tuesday, December 15th 1998, 12:00AM

by Philip Macalister

Changes in the composition of the New Zealand Stock Exchange Top 10 index are likely to provide opportunities for share traders and headaches for some index funds.
The exchange has announced that Air New Zealand B and TranzRail are to be dropped from the top 10 and they will be replaced by Fernz Corporation and Auckland International Airport.
This marks an on-again, off-again year for Fernz and the top 10 index, as it was dropped earlier in the year when Sky TV listed.
Likewise, TranzRail only came into the index this year when Wilson and Horton was delisted.

The changes to the index provide investors with a trading opportunity as the buying and selling pressures created by index funds will most likely impact on share prices.
Research done by sharebrokers J B Were on stocks in the Australian All Ords index demonstrates that there is a clear co-relation between performance and index inclusion/exclusion over six weeks prior to the event and beyond the change.
J B Were's manager of private stockbroking Guy Hedley says while the research is on Australian stocks it is relevant to the New Zealand market.
The opportunity to profit is magnified somewhat as some index funds can't buy into the stocks until the index changes occur, yet the market is told several weeks in advance what changes are being made.
Hedley describes the timing of these particular changes, January 1, as horrible because volumes are so light over the Christmas holiday break.
Particularly hard hit will be Fernz. He says index funds will probably have to pick up about 3 million Fernz shares in total once the changes take place, yet it is a fairly sparsely traded stock.
In recent months the volume of Fernz shares traded has been about 1.5 to two million shares a month, and so far about 500,000 have been traded in the month to date.
Because of a script shortage funds like TeNZ could end potentially up with a big tracking error.
While the demand for Fernz shares is likely to have a positive impact on the company's share price, the news isn't so good for the dropped stocks, namely TranzRail and Air New Zealand B.
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