Passive funds drive trading frenzy
The frenzied trading activity in Fisher & Paykel Healthcare and Contact Energy shares on Thursday, the last day of the month, clearly demonstrated the impact of the passive funds sector.
This is because Fisher & Paykel Healthcare and Contact Energy moved in and out of the MSCI group of indices respectively at the close of trading on November 30.
Index changes are major sharemarket events and hedge funds have developed sophisticated models to predict when companies will move in and out of the major indices. These index changes are mainly based on sharemarket capitalisation.
The figures in the accompanying table suggest these models began to predict the Fisher & Paykel Healthcare and Contact Energy developments around the end of August and beginning of September as trading in these stocks increased dramatically.
There was no corresponding increase in activity for Auckland Airport, Fletcher Building or Spark.
F& P Healthcare and Contact Energy activity increased in the August/ September period as global hedge funds tried to profit from these index changes.
Strong buying interest in F& P Healthcare shares pushed the price from $ 11.77 on August 31 to $ 13.10 on November 30. This ensured that the company would meet the MSCI Index market capitalisation requirements and purchasers would profit from the move.
Trading reached a peak on Thursday when $ 709.1m of F& P Healthcare shares and $ 429.7m worth of Contact Energy shares were transacted, mostly in the last few minutes before the market closed. These are amazing figures, particularly in contrast to the monthly trading data in the accompanying table.
Consequently, passive funds had to pay more for their F& P Healthcare shares than they would have paid at the end of August. Contact Energy’s share price declined from $ 5.58 at the end of August to $ 5.40 on November 30.
Ironically, the move to passive funds continues even though global active funds have outperformed passive funds in 2017.