The Indexing Tail Wags the Corporate Dog
By Journal of Indexes Staff

"If you look at News Corp in terms of its size and significance in the industry, it's an S&P 500 company: a leading company in a leading industry," said David Blitzer, head of indexing at Standard and Poor's. "Had they been an American company all along, they would have been in the index all along."

The quick addition to the S&P 500 comes as no surprise to index watchers; S&P eligibility was one of the key reasons why News Corp. decided to officially become an American firm.

"The reincorporation is expected to benefit all shareholders by increasing the scope and depth of the shareholder base, improving trading liquidity, enhancing access to the capital markets and making the Company's shares eligible for inclusion in a variety of U.S.-based indices," News Corp. said in an April press release.

Index eligibility is no small thing, either: a back-of-the-envelope calculation says that indexers will have to buy close to 277 million shares for their S&P 500 accounts, or almost 100X average daily volume. Some of those shares will simply be transferred from other accounts, most notably from Australia, but still, it's a significant buy.

The News Corp. story may be a bigger deal in Australia than it is in the U.S., as the company represented approximately 6% of the total Australian market capitalization, and played a huge role in many Australia-indexed portfolios.

"The removal of News Corp. from Australian indexes will accentuate the already overweight sectors like Financials," said Peter Vann, banking analyst for Australia's Constellation Capital Group.

The move will also challenge the trading capabilities of Australian asset managers, who will have to remove News Corp. from Australia-indexed portfolios.  To accommodate this change, S&P has agreed to transition the stock out of its Aussie indexes in four stages over 9 months.  It's the first time the S&P has used a "stepped" process to remove a stock from an index.

S&P also provided indexers with extra lead-time for the move, announcing their intentions a month ahead of time, rather than the typical four or five days.  The indexing giant stopped short, however, of naming the company being removed from U.S. index, deciding instead to wait until sometime closer to the final date.

"Had we announced the company coming out of the index, and then just let it hang there for three or four weeks, I think that would have been disruptive to the trading of the company," Blitzer said.