The Straits Times Index is Changing: What Investors Should Know

As Foolish investors may know, the Straits Times Index (SGX: ^STI), the most prominent market benchmark in Singapore, is made up of 30 different stocks. What may not be that well-known is that the list of 30 is reviewed on a quarterly basis to determine whether any changes should be made.

In a joint release yesterday, the index’s co-creators – Singapore Press Holdings LimitedSingapore Exchange Limited, and FTSE Russell – announced that three companies would be taken out of the index. They are namely Jardine Matheson Holdings Limited (SGX: J36)Jardine Strategic Holdings Limited (SGX: J37), and Olam International Ltd (SGX: O32).

They will be replaced in the index by three reserve list stocks, namely Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6)UOL Group Limited (SGX: U14), and SATS Ltd (SGX: S58).

As a brief background, SATS provides airline catering and gateway services; if you’ve been to Changi Airport before or flown from Singapore, it’s likely that you’d have experienced SATS’s services up front.

Next up, Yangzijiang Shipbuilding – as its name implies – is in the business of shipbuilding and offshore engineering.

Lastly, UOL Group is a property development and management company that also runs hotels. It may be best known for its Pan Pacific branded hotels and its stakes in the commercial/retail properties Novena Square and United Square.

The benchwarmers

In the same announcement, the reserve list for the Straits Times Index was also updated. The new list is made up of Singapore Post Limited  (SGX: S08)Keppel REIT (SGX: K17)CapitaCommercial Trust (SGX: C61U)Suntec Real Estate Investment Trust (SGX: T82U), and M1 Ltd (SGX: B2F).

There are three notable things about the reserve list.

First, the list includes three real estate investment trusts; this may be a reflection of the growing importance of REITS in Singapore’s stock exchange.

Second, the reserve list contains stocks that have strong links to companies that are already part of the Straits Times Index. CapitaCommercial Trust is managed and partly owned by current Straits Times Index constituent Capitaland Limited (SGX: C31). The REIT’s peer, Capitaland Mall Trust (SGX: C38U), is also an index component.

Two other names in the reserve list – Keppel REIT and M1 – are partly owned by another Straits Times Index constituent, Keppel Corporation Ltd (SGX: BN4).

Third, if M1 is able to make its way into the index, all three major Singapore telcos, including Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3), would be a part of Singapore’s most prominent stock market benchmark.

What these changes mean for investors

There’s a chance that the share prices of the new constituents may get to enjoy a short-term bump up because index funds tracking the Straits Times Index have to buy shares in them.

But over the long term, investors should still look to the underlying businesses of the newcomers to the Straits Times Index to see if their shares are worth owning.

As for the trio of Jardine Matheson, Jardine Strategic, and Olam, being removed from the index does not necessarily mean that their businesses are in trouble. That’s because the index changes had been partly driven by enhanced rules to the liquidity requirements for an index component.

All of the changes mentioned above will take effect on 21 September 2015.

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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 Chin Hui Leong owns shares in Suntec REIT.