The index of Canada’s biggest stocks has welcomed a gold company and said goodbye to an energy player, but the changes that weren’t made are even more notable.
S&P Dow Jones Indices said it will add Kirkland Lake Gold Ltd. when it rebalances the S&P/TSX 60 on Sept. 23 and remove Husky Energy Inc. to do so. Kirkland Lake is up about 75 per cent this year, while Husky has declined by about one-third.
Often loosely described as a blue-chip index, the S&P/TSX 60 is not simply composed of the 60 best-performing stocks on the Toronto Stock Exchange, however, nor is it the five dozen most valuable companies. Instead, there are a handful of complex rules governing membership, and one of them, regarding sector balancing, suggested that the committee might have added Air Canada to the ranks – and delete either Bombardier Inc. or SNC-Lavalin Group Inc. to do so.
Hundreds of billions of dollars of Canadian mutual-fund and ETF money is tied to either the S&P/TSX Composite Index, which has 239 members, or the 60, which is selected from the Composite membership. But while more funds likely track the broader Composite, membership in the 60 can be seen as a proxy for becoming a Canadian blue-chip stock.
S&P does not generally comment on index changes, which are made by a committee that has a fair amount of discretion. The announcement on late Friday came earlier than expected and was not accompanied by any details on the upcoming quarterly rebalancing of the Composite itself, which also takes place Sept. 23. That announcement is expected by week’s end.
S&P does say, however, that it feels the 60 needs to have an industry balance that represents the broader Composite index. And Chris Murray, an analyst at Altacorp Capital who looks at index rebalancing issues, had noted that the S&P/TSX 60 was underweighted in industrial stocks, with 9 per cent – compared with 10 per cent in the Composite – in part because of stock-price declines in SNC and Bombardier. He wrote in a recent research report that the largest industrial stocks not in the 60 were Air Canada, followed by civil-aviation training company CAE Inc. and engineering firm WSP Global Inc.
On Monday, Mr. Murray said via e-mail that Friday’s announcement, which left industrials unaddressed, “did come as a bit of a surprise.” He notes the S&P committee’s decision simply took the smallest stock out – Husky – and replaced it with one of the largest.
Inclusion in the index is not based on market capitalization, which is a company’s outstanding shares times its stock price. Instead, it’s based on “public float,” or the value of shares that are held just by the general investing public, excluding insiders and major long-term shareholders. Companies with large insider ownership, by controlling families or by institutional shareholders, will appear smaller because of this calculation. (Which shareholders S&P counts in which camp is not publicly known.)
Husky has a market capitalization of more than $9-billion, but only about 30 per cent of the company is owned by the public. Kirkland Lake’s float-adjusted capitalization of about $9.2-billion is about $200-million ahead of Air Canada’s, according to data from S&P Global Market Intelligence (an information provider that’s independent from the index group).
“A common misconception is that if you take out a bank, you have to put in a bank. That rarely happens," David Blitzer, chair of the index committee, said in a 2015 interview with The Globe and Mail. "The choice of the sector that comes in is not what went out, it’s looking at stocks of roughly the same size that are liquid and which one will do the most to push the sector balance back in the direction that reflects the industry balance in the Composite.”
He added: “What I would politely call a discretionary removal … is relatively rare in Canada. Obviously, the company leaving isn’t going to appreciate it, but my experience in the Canadian market is that surprises are not welcome and major departures from the rules are not welcome.”