TWR - Tower Insurance

[Poet]

As I understand it any reweighting is decided when its announced, (7 March) and is solely based on historical data that predates that announcement.
In terms of any reweighting I note the price hasn't changed much, up 2 cents, since the date of index inclusion in December when the closing match price was $1.40 but will be based on average market cap this quarter compared to last.   That said, recent entrants to the NZX50 carry very little weight in the index overall and I've been surprised how little the effect is of reweighting in subsequent periods after a company is initially included.  There's more effect from major constituents share price movements, e.g. if FPH really falls out of bed, everyone else gets reweighted up a bit in proportion to their index weighting.

Thanks for that Basil.

So it seems then that even if the relative index weighting of TWR doesn't change the index funds will still need to buy an additional 10% of shares to replace those that were cancelled in the buy back in order to maintain the correct proportion of TWR in their funds

[Basil]

Not 100% sure, sorry Poet.  There's not been very many of these share cancellations over the years. Index adjustment and changes seems to be all based on market cap.  Any changes required to be made to weightings in the June rebalance will be reflective of the market cap over the June quarter relative to March quarter.  A fair bit of cash has left the company coffers due to the buyback.  There are no magic free lunches here is how I see it.  All that cash leaving the balance sheet would tend to lower the market cap in my opinion, all other things being equal.

[Poet]

Not 100% sure, sorry Poet.  There's not been very many of these share cancellations over the years. Index adjustment and changes seems to be all based on market cap.  Any changes required to be made to weightings in the June rebalance will be reflective of the market cap over the June quarter relative to March quarter.  A fair bit of cash has left the company coffers due to the buyback.  There are no magic free lunches here is how I see it.  All that cash leaving the balance sheet would tend to lower the market cap in my opinion, all other things being equal.

Thanks

Actually, there could be a free lunch of sorts to be had here...
I think that TWR's timing of the cap return has been deliberately chosen so as to take advantage of the rebalance.
Clever TWR!
There are two factors in support of TWR SP rising at index rebalance date
First, the index weighting for TWR at this March review will have been determined based on TWR market cap before the capital repayment, hence either shareprice will rise by 10% at rebalance date or the index funds will need to buy an extra 10% of shares just to maintain the correct weighting in their portfolios.
Secondly, TWR shareprice has risen since last rebalance in December, whereas the overall NZX index has declined (due to SPK, FBU, RYM et al) so even if there was no TWR cap repayment, TWR's index weighting would have risen.
I guess we will see next week.

[BlackPeter]

Thanks for that Basil.

So it seems then that even if the relative index weighting of TWR doesn't change the index funds will still need to buy an additional 10% of shares to replace those that were cancelled in the buy back in order to maintain the correct proportion of TWR in their funds

Actually - if you think about it, this makes no sense at all.

Just imagine (for examples sake) all shares of a company are in index funds.

Company cancels 10% of their shares.

Following your argument index funds would need to buy shares which don't exist anymore (the cancelled ones) to fill up.

How are they going to do that?

I think it's fair to assume that the cancellation of shares does not impact on index funds at all - and hey, it doesn't - they still hold the same share of the company, don't they? This doesn't change with share cancellation or share splits. No need to do anything for the fund.

 

[Poet]

Actually - if you think about it, this makes no sense at all.

Just imagine (for examples sake) all shares of a company are in index funds.

Company cancels 10% of their shares.

Following your argument index funds would need to buy shares which don't exist anymore (the cancelled ones) to fill up.

How are they going to do that?

I think it's fair to assume that the cancellation of shares does not impact on index funds at all - and hey, it doesn't - they still hold the same share of the company, don't they? This doesn't change with share cancellation or share splits. No need to do anything for the fund.

 

Hmmm. Not sure about your example there, that's a bit like proving 1=2 by dividing them both by zero.

You are right that index funds own same percentage of company before and after cap return. But I don't think that the index algorithms are concerned with what percentage they own in each individual company. I think the index calculation is based on what proportion of the funds total $ value is invested in each index component.
So if for example twr is 1% of the index then each of the funds shoukd hold 1% of their $ value in twr. If a fund suddenly finds itself with 10% fewer shares in twr and twr shareprice hasn't changed then the fund needs to add shares to bring its investment in twr back up to being 1% of total funds

[BlackPeter]

Hmmm. Not sure about your example there, that's a bit like proving 1=2 by dividing them both by zero.

You are right that index funds own same percentage of company before and after cap return. But I don't think that the index algorithms are concerned with what percentage they own in each individual company. I think the index calculation is based on what proportion of the funds total $ value is invested in each index component.
So if for example twr is 1% of the index then each of the funds shoukd hold 1% of their $ value in twr. If a fund suddenly finds itself with 10% fewer shares in twr and twr shareprice hasn't changed then the fund needs to add shares to bring its investment in twr back up to being 1% of total funds

I think you miss here several important details. Dividing by zero is not one of them, though ;

First - there are different index tracking methodologies. Explain which of them you are referring to, and why. Remember - Every index tracking fund will have a different set of rules how they achieve their tracking. Most will be diffeerent and none of them will be perfect.

Here is a bit info about index tracking, but I am sure, there is somewhere stuff, which goes deeper:

https://kernelwealth.co.nz/blog/index-rebalancing-what-is-it

Second - if we assume the index fund you are referring to tracks indices based on marketcap (which is legitimate and makes sense), then absolutely nothing happens if the company cancels shares.

In an ideal world (rational market), the new marketcap should be the old marketcap minus whatever they refunded (bought back) shareholders. I.e. the index will go down by the amount the company refunded to their share holders, and the index tracking fund needs to do nothing - it tracks the index nicely by doing nothing.

If however the market does its usual thing, then depending on the current hype to brain ratio in the market, the price of the remaining shares will either represent a higher marketcap (minus payout) or a lower market cap than before. In both cases the index will move accordingly and the indexfunds need to do - yes, you got it: Absolutely nothing, given that they track the index.

Not even a storm in a teaccup.

Only exception I see - if the marketcap of the company changes through this action by that much that it either brings the stock into a new (additional) index, or it drops it out of some index. In this case, the relevant indexfunds need to do, what they always do: rebalance. But this is BAU, no matter why the company dorpped out or got into the index.

[Poet]

Second - if we assume the index fund you are referring to tracks indices based on marketcap (which is legitimate and makes sense), then absolutely nothing happens if the company cancels shares.

Thanks for links etc

An example maybe helps

NZX50 index is based on free float market capitalisation.

Let's say that at 7 March the NZX 50 has a 1% weighting to TWR based on TWR's market cap at 7 March

I run an index fund tracking NZX50 and I have $1 million under management so at 7 March I should have $10,000 invested in TWR so as to be tracking the index

At 20 March TWR cancels 10% of shares - so at 20 March I now only have $9000 invested in TWR shares so it is now only 0.9% of my fund

At 21 March my fund rules require that I rebalance so that I have 1% of my funds in TWR again - hence either the price of TWR has risen by 10% or I need to buy some extra shares so as to maintain the $ value of TWR shares at 1% of my portfolio

Anyway, that's the way I read it, could be completely wrong

[Basil]

Good luck with it Poet.  The only free lunch I am aware of with index matters is investing in a company getting included in the index, well ahead of the official announcement.  In that respect TWR provided canny investors with a real banquet when it was index included in December 2024.
I think you're probably being quite optimistic hoping for another decent free lunch but who knows for sure, maybe you'll get a kids sized school lunch similar to the size to the Govt's free school lunch program that's slightly nutritious and somewhat adequate  

[BlackPeter]

Thanks for links etc

An example maybe helps

NZX50 index is based on free float market capitalisation.

Let's say that at 7 March the NZX 50 has a 1% weighting to TWR based on TWR's market cap at 7 March

I run an index fund tracking NZX50 and I have $1 million under management so at 7 March I should have $10,000 invested in TWR so as to be tracking the index

At 20 March TWR cancels 10% of shares - so at 20 March I now only have $9000 invested in TWR shares so it is now only 0.9% of my fund

At 21 March my fund rules require that I rebalance so that I have 1% of my funds in TWR again - hence either the price of TWR has risen by 10% or I need to buy some extra shares so as to maintain the $ value of TWR shares at 1% of my portfolio

Anyway, that's the way I read it, could be completely wrong

Nobody is totally wrong (whatever this means), but sometimes statements are.

Well, in this case - your claim unfortunately is wrong.

Just a hint: Stop thinking about number of shares and start thinking about percentage of total marketcap.

If your company makes a sharesplit 10:1, would you expecty the index fund to sell 90% of its shares?

Of course not, given that the sharesplit would not change the value the fund holds. Neither does the share cancellation.

Nothing of value has changed if they increase or reduce the number of shares.

Anyway, have a good think about it ... and if this does not come to fruition - just wait and see.

[BlackPeter]

Good luck with it Poet.  The only free lunch I am aware of with index matters is investing in a company getting included in the index, well ahead of the official announcement.  In that respect TWR provided canny investors with a real banquet when it was index included in December 2024.
I think you're probably being quite optimistic hoping for another decent free lunch but who knows for sure, maybe you'll get a kids sized school lunch similar to the size to the Govt's free school lunch program that's slightly nutritious and somewhat adequate  

Great example. I hear that some poor kids got terribly burned with the gummits school lunch. Something prudent investors should avoid ;

[Poet]

If your company makes a sharesplit 10:1, would you expecty the index fund to sell 90% of its shares?

Of course not, given that the sharesplit would not change the value the fund holds. Neither does the share cancellation.

Nothing of value has changed if they increase or reduce the number of shares.

Anyway, have a good think about it ... and if this does not come to fruition - just wait and see.

There is a difference here

If a company makes a 10:1 share split (or consolidation?) then I wouldn't expect the shareprice of the new shares to be the same as the old shares. I would expect the split shares to be worth 10% of what the pre-split shares were worth. So an index fund holding during this process would have the exact same $ value of shares before and after hence no action required to maintain proportionality.

If as a result of the share split, the price of the new shares stayed the same as pre-split then of course the fund would need to sell 90% of the shares otherwise they would be heavily overweight this security (do you agree?)

With the TWR cancellation, commentators are suggesting that the post cap repayment share price will drop by the amount of the cap repayment (ie no free lunch). I'm just pointing out that if this is the case, then an index fund tracking the NZX 50 will need to buy more shares to maintain their position wrt TWR.

If the post cap repayment price of TWR stays the same then you are correct that an index fund doesnt need to do anything (But that would be a free lunch though wouldn't it?)

[Left Field]

deleted

[BlackPeter]

There is a difference here

If a company makes a 10:1 share split (or consolidation?) then I wouldn't expect the shareprice of the new shares to be the same as the old shares. I would expect the split shares to be worth 10% of what the pre-split shares were worth. So an index fund holding during this process would have the exact same $ value of shares before and after hence no action required to maintain proportionality.

If as a result of the share split, the price of the new shares stayed the same as pre-split then of course the fund would need to sell 90% of the shares otherwise they would be heavily overweight this security (do you agree?)

With the TWR cancellation, commentators are suggesting that the post cap repayment share price will drop by the amount of the cap repayment (ie no free lunch). I'm just pointing out that if this is the case, then an index fund tracking the NZX 50 will need to buy more shares to maintain their position wrt TWR.

If the post cap repayment price of TWR stays the same then you are correct that an index fund doesnt need to do anything (But that would be a free lunch though wouldn't it?)

Maybe you don't understand the nature of index funds. If the post cap repayment price is lower, than the index obviously drops, and the index tracking fund will reflect this without the need for anybody to buy or sell shares.

That's what index funds are all about.

[Poet]

Maybe you don't understand the nature of index funds. If the post cap repayment price is lower, than the index obviously drops, and the index tracking fund will reflect this without the need for anybody to buy or sell shares.

That's what index funds are all about.

Ok, maybe we need to agree to disagree here (although I do hate doing that in principal).

But before resorting to that, just one more go.

Of course an index tracking fund tracks the index passively for most of the time as you rightly point out.

What I am talking about here is the process of an index fund rebalancing (not the day-to-day BAU)

Every three months S&P determines what % of each index component is included in the total index.
If at the rebalancing date, an index fund finds itself with the incorrect % (by $ value) of various securities in their particular portfolio, then they buy and sell accordingly.

For the current rebalance at 21 March S&P will have determined TWR weighting based on the TWR market cap some weeks ago.

When 10% of a index tracking fund's TWR shares are cancelled on the 20th March (and if the TWR shareprice drops as a consequence) then that fund will have to buy extra TWR on the 21st rebalance date so that the $ proportion of TWR in the fund's portfolio remains the same.

As you say, not all funds track this way but certainly the majority of them do, I imagine that's why they are called index tracking funds.

[BlackPeter]

Ok, maybe we need to agree to disagree here (although I do hate doing that in principal).

But before resorting to that, just one more go.

Of course an index tracking fund tracks the index passively for most of the time as you rightly point out.

What I am talking about here is the process of an index fund rebalancing (not the day-to-day BAU)

Every three months S&P determines what % of each index component is included in the total index.
If at the rebalancing date, an index fund finds itself with the incorrect % (by $ value) of various securities in their particular portfolio, then they buy and sell accordingly.

For the current rebalance at 21 March S&P will have determined TWR weighting based on the TWR market cap some weeks ago.

When 10% of a index tracking fund's TWR shares are cancelled on the 20th March (and if the TWR shareprice drops as a consequence) then that fund will have to buy extra TWR on the 21st rebalance date so that the $ proportion of TWR in the fund's portfolio remains the same.

As you say, not all funds track this way but certainly the majority of them do, I imagine that's why they are called index tracking funds.

I understand what you try to convey, but it is based on wrong assumptions.

TWR is part of the index, and no matter what happens wth its marketcap, it will move the index accordingly.

The only balancing index funds need to do happens
a) when they are created and
b) when stocks fall out of the index or go into the index.
c) when investors remove or add funds

Everything else happens courtesy to the nature of index funds.

So - assuming TWR won't drop  out of the index (for this time its probably anyway too late) - there is no rebalancing to do.