S&P/TSX Preferred Share Index to Remove SplitShares

Well – they added them in July … and now it looks like they’re coming out.

I am advised by an Assiduous Reader that:

Standard & Poor’s Canadian Index Services announces that, effective with the December, 2007, semi-annual review of the S&P/TSX Preferred Share Index, there will be a change to the universe of eligible securities for this index. Split preferred shares, which are packaged securities linked to baskets of stocks (or single stocks), will no longer be eligible for inclusion in the index. Split preferred shares that are current constituents of the index will be removed in the upcoming index review, which will become effective after the close of Friday, January 18, 2008.Spit Shares affected: ALB.PR.A, BNA.PR.C, DFN.PR.A, FBS.PR.B, FIG.PR.A, LBS.PR.A, PIC.PR.A, RPA.PR.A, RPB.PR.A, WFS.PR.A

I am advised that this is due to liquidity concerns. I will post a link to a proper press release as soon as I find one … but S&P/TSX just hates giving anything useful away for free!

Update: The press release is on S&P’s site – I missed it earlier because I thought it was entirely about the equity indices. The title is Standard & Poor’s Announces Changes in S&P/TSX Canadian Indices, dated 2007-11-26. The list of split shares affected appears to have been appended by my correspondent; I have checked it against the constituent list and agree.

Update, 2007-11-28: I have spoken to a very pleasant and patient woman at S&P, who confirms my correspondent’s indication that split shares are being removed due to liquidity issues. From the published methodology:

Volume. The preferred stocks must have a minimum trailing three-month average daily value traded of C$100,000 at the time of the rebalancing.

As of November 27, HIMIPref™ calculates the average daily value as:

Split Share
Average Trading Value
Issue A T V
ALB.PR.A 121,670
BNA.PR.C 159,859
DFN.PR.A 105,638
FBS.PR.B 134,628
FIG.PR.A 117,981
LBS.PR.A 107,586
PIC.PR.A 155,473
RPA.PR.A Not Tracked
RPB.PR.A Not Tracked
WFS.PR.A 127,613

Click the link for the HIMIPref™ definition of Average Trading Value; it’s not a “trailing three month average”, but will almost always be less than this figure, due to the imposition of caps on the daily change in the average, put in place to prevent a one-day spike in volume (somebody unloading a million shares, for example) distorting a simulation’s estimate of how much one can reasonably expect to do.

So, it looks like the liquidity constraint as published is not the issue; S&P told me they had also talked to some institutional traders and listened to their liquidity concerns. This makes more sense; the split shares have a decent enough daily volume, but they rarely trade in blocks because very few holders actually have a block to trade. Such traders could accumulate enough shares to make up their trades, but it would be spread out, perhaps over several days, and increase the execution risk on the trade.

We may conclude that the change has been made due to the paucity of block-trading in the split-share market. Fair enough! The elimination of split shares will simply make the index easier to beat and I’m fine with that.

4 Responses to “S&P/TSX Preferred Share Index to Remove SplitShares”

  1. […] was added to the S&P/TSX Preferred Share Index in July, 2007 and removed in December. The issue is tracked by HIMIPref™ and comprises part of the SplitShare […]

  2. […] DBRS mass review of financial splits has been previously discussed. The issue was removed from the S&P/TSX Preferred Share Index effective December with all the other split-shares. WFS.PR.A is a member of the HIMIPref™ […]

  3. […] previous rebalancing of TXPR removed SplitShares; this was claimed to be due to liquidity concerns … which, on […]

  4. […] of this fund changes with each rebalancing; there have been significant index changes in July 2007, January 2008 and July […]

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