What Does a Recent Change in the Straits Times Index Mean For Investors?

Last Tuesday, it was announced that there would be changes made to the constituents of Singapore’s widely-quoted stock market barometer, the Straits Times Index (SGX: ^STI).

The current version of the index was launched in Jan 2008 and is being built and maintained by a trio of companies: 1) FTSE, a company that constructs market indices; 2) Singapore Press Holdings, the owner of a wide swath of Singapore-based multi-media assets that include national newspapers (The Straits Times), broadcast channels, radio shows, and internet portals; and 3) Singapore Exchange, the operator of our local stock exchanges, the Mainboard and Catalist exchange.

The latest change to the Straits Times Index involves the substitution of Ascendas REIT (SGX: A17U) for CapitaMalls Asia (SGX: JS8) as an index component on 4 June 2014. The change had to be made due to CapitaLand’s (SGX: C31) recent privatisation offer for CapitaMalls Asia. With more than 85% of CapitaMalls Asia now effectively controlled by CapitaLand due to the takeover offer, CapitaMalls Asia has to be removed from the index due to the ground rules set in place by SPH, SGX, and FTSE.

This change would in all likelihood not affect investors who aren’t invested in the shares involved. But, it does contain one important point to grasp about the Straits Times Index itself: The index might not be nearly as diversified as you may think. The substitution of one property company for another property company doesn’t exactly improve diversification.

It is common for investors to think of themselves as being adequately diversified if they were to hold 30 different shares as they would with an investment in the SPDR Straits Times Index ETF, an ETF that tracks the Straits Times Index. But, things aren’t what they seem beneath the surface.

The Straits Times Index has a number of  components that could present correlated risks for investors. For instance, Jardine Matheson Holdings owns significant stakes in Jardine Strategic Holdings, Jardine Cycle & Carriage, and Hongkong Land Holdings. Elsewhere, Singapore Airlines and SembCorp Industries are part owners of SIA Engineering and Sembcorp Marine respectively.

In terms of diversification, owning 30 different shares would of course be better than owning just, say, three shares. But at the same time, it also pays to be aware of the kinds of intersections that each share might have with others in your investment basket in order to have a better idea of the real risks involved.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.