MSCI’s quarterly index rebalancing features significant shifts involving big Canadian names.
The firm’s All Country World Index (ACWI) is the benchmark for more international passive money than any other index series, notes Chad Dale, director of index and ETF research at ITG Canada. The index is market-cap weighted and has a liquidity screen, “which ensures big companies with shares that don’t trade a lot won’t get in.”
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Fairfax Financial has been added to the ACWI after getting the boot in 2012. “This ties into the BlackBerry story in an interesting way,” says Dale. In August, Fairfax chairman and CEO Prem Watsa stepped down from BlackBerry’s board—around the same time the smartphone maker announced it was exploring a sale.
Read: Fairfax pulls BlackBerry offer, Watsa returns
“There was speculation that Watsa was stepping down because Fairfax was going to make a bid, which some thought was a conflict of interest. Fairfax’ share price has risen steadily since then. [Trading] volume has also picked up from around 24,000 a day to about 40,000. That liquidity change is what got Fairfax onto MSCI’s index.
“It also didn’t hurt that the share price hit its one-year high right around the time MSCI was doing its calculations. So in effect,” says Dale, “Fairfax gets onto the index thanks to all the speculation around the BlackBerry acquisition.”
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He also highlights a rotation in Canada out of energy and into materials—the opposite of what’s happened globally.
“The driver is MSCI moving Methanex (MX) from the small-cap to the standard index. This market-cap promotion drives demand because the number of people who have to buy Methanex’ shares to replicate the standard index outnumber those who have to sell to reflect the firm’s removal from the small-cap index.”
On the flip side, Bonavista Energy (BNP) is getting booted from the standard to the small-cap index, “further driving the sector rotation,” says Dale.
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