HOW DIVERSIFIED ARE MARKET INDEXES?

For the regular investor with the “if you can’t beat them, join them” mind-set, the common adage would be to buy the index. But the crux of the matter boils down to the issue of – how many of us really know what exactly we are “joining”?

With the S&P 500 Index (INDEXSP: INX) FY2013 north of 20% returns compared to the relatively flat returns of both the Hang Seng Index (INDEXHANGSENG: HSI) YTD and Straits Times Index (SGX: ES3), no 2 indexes, like fingerprints, are exactly the same.

 What exactly is the Straits Times Index?

The Straits Times Index is the most globally-recognised benchmark index and market barometer for Singapore representing the top 30 companies by market capitalization on the SGX Main Board that pass the relevant investability, liquidity, transparency and availability screens. The Straits Times Index was the headline index of the FTSE ST Index Series, a family of indices created by Singapore Press Holdings Ltd (SGX: T39), Singapore Exchange Ltd (SGX: S68) and FTSE Group.

Source: FTSE Factsheet as at Apr 30, 2014

From the table above, one wouldn’t be too off-the-mark to indicate that the Straits Times Index was heavily skewed towards certain industries. An example would be the Banking supersector, which was made up of only 3 constituents with DBS Group Holdings Ltd (SGX: D05) at 10.66%, Oversea-Chinese Banking Corp. Ltd (SGX: O39) at 9.47% and United Overseas Bank (SGX: U11) coming in at 9.33% in terms of weightage in the Index.

Additionally, the top 10 constituents made up 64.26% of the Straits Times Index.

Even within a single country, there may be more than one index tracking the market. And in Singapore’s case, it would be the FTSE ST All-Share Index.

Source: FTSE Factsheet as at Apr 30, 2014

Relative to the FTSE ST ALL-Share Index, the Straits Times Index was skewed to larger constituents. The Straits Times Index was also more concentrated with only 30 constituents. Its top 10 holdings making up 65.22% of the index.

Value In Action

Even when we end up “buying the market”, it would be advantageous to be aware of the type of “markets” are we buying. That means to be aware of the underlying constituents. Otherwise instead of diversifying we might end up unwittingly putting all our eggs into one big basket!

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity. It does not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.