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During a recent visit to London I read an article in the financial press regarding buying shares in companies about to be listed on the ASX. The theory being that managed funds would have to buy some of the new listings (eventually) to get their portfolios “balanced” . I can’t recall the terminology, so can you refresh my memory? And, what do you think of the concept of buying these about-to-be-listed stocks, and finally, how does one get access?
A: The article you read probably referred to “ïndex inclusion” – a process that occurs for some companies 3 to 6 months after they list.
The theory is that index based funds (such as ETFs and other passive managers) are required to buy shares in the company as they get added to the index – and this lends support to their share price.
An example might be Medibank, which listed last December, and was added to the S&P/ASX 50, S&P/ASX 100, S&P/ASX 200 and S&P/ASX 300 indices on 20 March.
If you look at the Medibank share price, it rose quickly after listing to peak in mid- February, and has largely been in a downward trend since then, now finding support around $2.10.
Bottom line – index inclusion is a demand factor to take account of. However, the whole market knows about it (well publicized) and in the scheme of things, there are probably far more important factors that influence share prices.
