INVESTORS in the local bourse will witness the launch of an enhanced benchmark index next Monday, July 6. The KL Composite Index will be known as the FTSE Bursa Malaysia KLCI (FBM KLCI) and will continue to be the bellwether index for the Malaysian stock market, as it had been since its creation in April 1986.

A more investor-friendly bellwether index
One of the major features is that the FBM KLCI will be leaner and more robust, consisting of the 30 largest eligible companies by market capitalisation instead of the current 100 stocks in the KLCI.

The main aim is to make the index easier to replicate. That is, investors tracking the benchmark index will now only need to buy 30 stocks, rather than having to own 100 different stocks. In addition to being a much larger basket, the latter is also more costly to maintain and some of the smaller stocks can be quite illiquid.

Statistics indicate that the smaller basket of stocks in no way undermines the index as a representative of the underlying market. Indeed, the largest 30 companies make up roughly 70% of the total market capitalisation for the local bourse — well in line with the percentage of market capitalisation for benchmark indices in key global markets.

In short, the FBM KLCI remains a good representative of the local bourse while being a significantly more manageable basket of stocks.

Keeping Bursa Malaysia relevant in the global market
The tie-up with the FTSE Group, a world leader in the creation and management of indices, offers the FBM KLCI instant recognition and credibility among investors, both local and foreign.

The FBM KLCI will be part of the FTSE Bursa Malaysia Index Series. It is calculated based on globally accepted index methodology, which is transparent to inspire confidence.

The index will be computed based on free float adjusted market capitalisation. Companies must have at least 15% of free float to be eligible for inclusion. This means a stock with higher free float will gain greater weightage in the index.

For example, Public Bank with a free float factor of 100% will be weighted based on its entire market capitalisation while Sime Darby with a free float factor of 75% will only be weighted based on three-quarters of its market capitalisation.  

Table 1 lists the 30 constituent stocks for the FBM KLCI as well as their respective weights in the index based on share prices as at June 11, 2009. The weights will vary in line with share price movements.

The basket of stocks for the FBM KLCI will also be screened for liquidity. Each constituent stock must maintain a minimum turnover of 10% of its free float shares in the 12 months prior to an annual review in December.

The FBM KLCI will also be more in tune to rapid changes in the market environment. The index will be calculated every 15 seconds compared to the 60 seconds currently for the KLCI.

Pave the way for new products
Thus, what we will have in the FBM KLCI is an investable and tradable index of institutional quality comprising a more manageable basket of stocks.

This should, in turn, pave the way for the creation of more investment options such as Exchange Traded Funds (ETF), exchange traded derivatives, structured warrants and other index-linked products that will enhance overall market depth and liquidity.

An ETF is a passive unit trust, where its basket of stocks simply mirrors the constituent stocks of the underlying index. Hence, it typically has cheaper management fees compared to traditional unit trusts but still offers investors the same benefits of diversification.

The FBM30etf, for instance, is a good instrument for investors to efficiently track the market barometer. (Currently, the FBM30etf tracks the FBM30 index, which will be superseded by the FBM KLCI when it is launched)

For starters, the ETF is very affordable in the sense that investors do not have to buy a stake in each and every of the 30 constituent stocks. They can buy the usual 100 board lots of the FBM30etf, currently trading at RM6.95 per lot, and still match the benchmark index's performance. Investors can easily buy more or sell the listed ETF, just like any other stock in the market.

Preserving the KLCI's historical continuity
Last but not least, the FBM KLCI will preserve the continuity of the KLCI and historical trend of the local bourse. This will address the needs of market observers, in particular, technical market analysts.

In addition, there will be no change to the index value. The enhanced index will adopt the KLCI's last closing value when it is launched. For example, if the KLCI closes at 1,000 points on Friday, July 3, the FBM KLCI will begin at the same level on Monday, July 6.

Suite of indices for multitude investors
Bursa Malaysia will maintain its existing suite of indices catering to specific requirements of multitude investors.

The FTSE Bursa Malaysia index series cover other constituents in the Main Board and are divided further into various segments such as mid, small, fledgling, EMAS as well as Islamic indices. These indices provide various asset classes that offer wider investment opportunities to the investors. So, existing users of the KLCI that would prefer a broader coverage of companies can now adopt the FBM Top 100 index.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.