The Straits Times Headline: STI fall below 3,000 points

Let's not forget that the STI is reviewed every quarter. Hence, poor performing stocks will be discarded and replaced by better performing stocks. Coupled with inflation, there is only one direction that the STI can move - Northwards. Of course, I'm thinking 10 years and beyond.

Studies have also shown that majority of the people are unable to beat the market and thus, investing in the index is a better option.

just my thoughts!

(06-02-2014, 12:19 AM)pantoo Wrote: Let's not forget that the STI is reviewed every quarter. Hence, poor performing stocks will be discarded and replaced by better performing stocks. Coupled with inflation, there is only one direction that the STI can move - Northwards. Of course, I'm thinking 10 years and beyond.

Studies have also shown that majority of the people are unable to beat the market and thus, investing in the index is a better option.

just my thoughts!

How does SGX prevent an artificial step change in STI following any changes in its components?

From the link http://www.investopedia.com/terms/d/dowdivisor.asp
Most likely STI uses similar method.

"Most corporate actions such as stock splits and spinoffs have served to push the value of the Dow Divisor lower. The fact that the Divisor is now well below one means that the divisor actually functions as a multiplier!"

(06-02-2014, 12:26 AM)GPD Wrote:

(06-02-2014, 12:19 AM)pantoo Wrote: Let's not forget that the STI is reviewed every quarter. Hence, poor performing stocks will be discarded and replaced by better performing stocks. Coupled with inflation, there is only one direction that the STI can move - Northwards. Of course, I'm thinking 10 years and beyond.

Studies have also shown that majority of the people are unable to beat the market and thus, investing in the index is a better option.

just my thoughts!

How does SGX prevent an artificial step change in STI following any changes in its components?

pardon my ignorance. but what is an "artificial step change"?

(06-02-2014, 08:49 AM)pantoo Wrote:

(06-02-2014, 12:26 AM)GPD Wrote:

(06-02-2014, 12:19 AM)pantoo Wrote: Let's not forget that the STI is reviewed every quarter. Hence, poor performing stocks will be discarded and replaced by better performing stocks. Coupled with inflation, there is only one direction that the STI can move - Northwards. Of course, I'm thinking 10 years and beyond.

Studies have also shown that majority of the people are unable to beat the market and thus, investing in the index is a better option.

just my thoughts!

How does SGX prevent an artificial step change in STI following any changes in its components?

pardon my ignorance. but what is an "artificial step change"?

Assuming an index is made up of two components with market cap of $50mil each and the resultant index is 100. Say they reviewed and change one of the components and the new component has market cap of $40mil. With the change the resultant index becomes 90. So there is a 10% change not due to market driving it.

(06-02-2014, 09:28 AM)GPD Wrote: Assuming an index is made up of two components with market cap of $50mil each and the resultant index is 100. Say they reviewed and change one of the components and the new component has market cap of $40mil. With the change the resultant index becomes 90. So there is a 10% change not due to market driving it.

the formula for the STI calculation (which is true for most FTSE indexes):

sum[ (market cap*investibility factor*capping factor)/divisor ]

the calculators will be able to adjust capping factor to ensure continuity of the index on constituent changes.
(it seems investibility factor is a measure of free float while divisor is used to deal with share capital changes e.g. splits)

(05-02-2014, 11:53 AM)ghchua Wrote: So, my strategy is when the market on a whole is down, I pick index stocks and/or buy STI ETF to add beta. When markets are going nowhere or on a upward move, I tend to pick individual stocks that are not in the index to add alpha into my portfolio. In this way, there is a balance between alpha and beta in my portfolio.

The strategy for value investor is to buy and hold undervalued stocks. When you can buy $1 worth for 50cents and sell later at $1.50 or $2 you don't really need to care about alphaing or betaing.

INDEXing is not for value investors whether market up or down.

(06-02-2014, 09:52 AM)AlphaQuant Wrote:

(06-02-2014, 09:28 AM)GPD Wrote: Assuming an index is made up of two components with market cap of $50mil each and the resultant index is 100. Say they reviewed and change one of the components and the new component has market cap of $40mil. With the change the resultant index becomes 90. So there is a 10% change not due to market driving it.

the formula for the STI calculation (which is true for most FTSE indexes):

sum[ (market cap*investibility factor*capping factor)/divisor ]

the calculators will be able to adjust capping factor to ensure continuity of the index on constituent changes.
(it seems investibility factor is a measure of free float while divisor is used to deal with share capital changes e.g. splits)

Based on your reply above, does it mean to say that resultant index is not affected by a change in components? So for example, if a huge market cap stock (larger than Singtel) comes on board the STI, the index will not automatically increase due to the large market cap?

(06-02-2014, 01:34 PM)pantoo Wrote: Based on your reply above, does it mean to say that resultant index is not affected by a change in components? So for example, if a huge market cap stock (larger than Singtel) comes on board the STI, the index will not automatically increase due to the large market cap?

the capping factor will be changed to keep the index unchanged upon the replacement (albeit temporarily). So by right for each index component in the STI, you can find the 3 distinct factors for each (i.e. its actual weight)

so: market cap of previous component*factor(previous)= market cap of new component*factor(new)

I did a quick google to find some "proof"

http://www.sph.com.sg/article.display.php?id=76

you can see the updated factors in the article (albeit in 2003! - too lazy to find newer examples)

********************************

Changes to The Straits Times Index

Following a review of the Straits Times Index (STI), three changes will be made to the component stocks of the index at the start of trading on Tuesday, 1 April 2003.

Hotel Properties, Marco Polo Developments and United Industrial Corporation will be replaced by MobileOne, Allgreen Properties and People’s Food. The main criteria used in the review were liquidity, as measured by average daily value traded, and market capitalisation.

In addition, following the merger of Delgro and Comfort, the new merged entity, ComfortDelgro, will become a component stock of the STI at the start of ComfortDelgro’s second day of trading. Delgro, which is currently a listed stock, will be removed from the STI upon its delisting from the Singapore Exchange on March 31.

The weight factors of several index stocks will also be updated on Tuesday, 1 April 2003 to reflect corporate actions that have taken place. (See table below.)

Patrick Daniel, Managing Editor of English and Malay Newspapers, Singapore Press Holdings Limited, who chaired the STI Review Committee, said: "With these changes, the 45 stocks in the STI continue to capture a high 77% of the average daily value traded on the SGX and 72% of the market capitalisation of stocks listed on the SGX."

Contact person
Julie Wee,
Tel: 6319 5367
Email: juliew@sph.com.sg

STI Review Committee
The Straits Times
Singapore Press Holdings Limited
25 March 2003

Table of index stocks with new weight factors

Name Current weight factor New weight factor
1 Allgreen Properties - 0.40
2 Chartered Semiconductor 0.30 0.40
3 ComfortDelgro - 0.85
4 Creative Technology 0.60 0.65
5 Datacraft 0.40 0.50
6 GES International 0.45 0.70
7 Hotung Investment 0.65 0.75
8 MobileOne - 0.60
9 Parkway Holdings 0.60 0.80
10 People’s Food - 0.25
11 ST Assembly 0.25 0.30
12 SembCorp Industries 0.47 0.50
13 Singapore Exchange 0.70 0.95
14 United Overseas Land 0.50 0.55
15 Venture 0.65 0.70

It will make sense because any real changes in the index should be driven by market forces. I also assumed the weight of each contributing component to remain the same at the point of transition so that index doesn't become more volatile the next day.