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Three Interesting Facts About the Straits Times Index

The Straits Times Index (SGX: ^STI) is perhaps the one name that’s most identified with Singapore’s share market. Its first incarnation appeared in 1966, and since then, has been used as a general market-barometer here.

Currently, the STI is constructed as a market-capitalisation-weighted index using 30 shares, i.e., the higher the total market value of all of a company’s shares, the more weight it shall receive in the index.

But, do you know what goes on behind the scenes with the STI? Here are three interesting factoids that might not only be on a ‘good-to-know’ basis but which might also have implications for investors looking to invest in the index itself through trackers like the STI SPDR ETF (SGX: ES3) or Nikko AM Singapore STI ETF (SGX: G3B)

1) The 30 shares in the STI are selected based on their market value, free float, and liquidity

The latest version of the STI was launched in January 2008 when three companies – newspaper publisher Singapore Press Holdings, stock exchange operator Singapore Exchange, and British-based stock market index creator FTSE – partnered to create it.

To be included into the STI, companies must be the “largest 30 companies by full market capitalisation that meet stated eligibility requirements.

These eligibility requirements deal with a company’s free float as well as liquidity.

Shares of a company that are considered as ‘free float’ are essentially shares that are not held by insiders; by other public companies; by investors who view the shares they hold to be strategically important for their own purposes; by governments around the world; and by sovereign wealth funds, among others.

To put it another way, you can think of free-float as shares that are freely available to be bought and sold by investors on the street like you and me.

So, a company that does not have a free float of 15% or more, are not eligible to be included into the index. For example, F&N (SGX: F99), under its current ownership status, will not be eligible for inclusion into the STI. Beer brewer Thai Beverage and TCC Assets, which are both controlled by Thai billionaire Charoen Sirivadhanabhakdi, together own almost 90% of F&N.

As for liquidity requirements, it is based on the median daily trading volume per month for a company’s shares. To be considered for inclusion into the STI, the median daily trades per month must be at least 0.05% of the company’s total shares (after adjusting for its free float) for at least 10 out of 12 months prior to March or September. Those two months are when a review of the index takes place.

To sum it all up, to be in the STI, a company must have a large market value in addition to its shares being highly liquid and having a significant portion that’s not controlled by large and important shareholders.

2) The STI is dominated by only a handful of companies

The STI is comprised of 30 companies, that’s pretty common knowledge. But did you know that as of 31 July 2013, it took only five companies to take up nearly half the index’s weighting as shown in the table below?

Company Index Weighting as of 31 July 2013
SingTel (SGX: Z74) 10.6%
DBS Group Holdings (SGX: D05) 10.5%
Oversea-Chinese Banking Corporation 10.5%
United Overseas Bank 9.2%
Jardine Matheson Holdings 6%
Total 46.7%

Source: FTSE

It’s striking to see how the finance and telecom industry – represented by DBS, OCBC and UOB for the former, and SingTel for the latter – have such lopsided influences on the STI’s movement by virtue of the relatively huge market values of those four companies.

That’s important to know for the index’s investors because the weightings of the companies in the STI can give them a better idea on the risk exposures that they face.

3) The STI is a huge representative of the Singapore stock market but it is only a drop in the ocean compared to the global financial markets

The full market value of the 30 companies in the STI represents more than half the total market value of all companies listed in Singapore. That’s huge. But, for investors who are focused only on the STI and Singapore’s market, they might be missing out on a whole lot more.

According to the World Bank, the total market capitalisation of all Singapore-listed companies stood at US$414b in 2012.

Now here’s a sample for what the rest of the world looks like:

Country Total Market Capitalisation in 2012
Australia US$1,286b
Brazil US$1,230b
China US$3,697b
Germany US$1,486b
Hong Kong US$1,108b
Malaysia US$476m
United Kingdom US$3,019b
USA US$18,668b

Source: Worldbank

Our stock market’s tiny compared to giants like the USA and China. But what does this mean for local investors? It simply means that there are plenty of opportunities to invest in other parts of the world besides our market. As good as some of our local stock market bellwethers have been, we should still be aware that sometimes, the world can be our oyster.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.