How A $27bn Move Could Affect Your Decisions

Sun Herald

Sunday September 26, 2004

John Kavanagh

Keep an eye on indexes, writes John Kavanagh, editor of Personal Investor.

Investors are increasingly turning to non-traditional investments to boost their returns. Should you do the same? See this month's Personal Investor. www.personalinvestor.com.au.

NEWS Corporation shareholders will gather in Adelaide on October 26 to vote on a proposal by the company's board that News change its place of incorporation from Adelaide to Delaware in the US.

The board says a move to the US makes sense because News generates 70 per centof its revenue from US business these days and that a change in status from an Australian to a US company would make it easier for the media group to tap the US capital market for funds needed for acquisitions and business investment.

A lot of the debate about this move has centred on the fact that News would no longer be included in any of the local sharemarket indexes.

Instead, it would be included in the S&P 500, an index that tracks the progress of the 500 biggest stocks traded on the New York Stock Exchange.

It is important to remember that News Corp stock will still be traded on the Australian Stock Exchange and that investors who want to buy or sell the company's stock will be able to do it using their regular full-service or online broker.

So what is all the fuss about indexes?

A sharemarket index is nothing more than a measure of the average performance of stocks included in the index.

US company Standard & Poor's is the provider of indexes for the ASX and it publishes a range of them covering the top 20, 50, 100, 200, 300, the All Ordinaries (500 stocks) and small companies.

But these indexes are important because fund managers use them as performance benchmarks.

Managers set out to match the return of a given index (if they are passive or index managers) or beat it (if they are active managers) over a given period.

You, too, can use the indexes as a guide to the relative performance of your portfolio.

In the case of News Corp, its removal from the ASX indexes and its inclusion in theS&P 500 means that some local fund managers will sell their News holdingsand US fund managers will need to buy it.

If shareholders support the company's proposal the stock will go through aperiod of volatility.

Broker Macquarie Equities has estimated that local and regional fund managers would sell more than $US19 billion ($27 billion) of News Corp stock if it moves out of theASX indexes and that demand fromUS buyers initially would be $US11.4 billion ($16.3 billion).

Companies move in and out of indexesall the time as their market capitalisation changes.

You should keep an eye on these changes because they can be a guide to price movement.

© 2004 Sun Herald

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