Many thanks for that comment
@Goldhawk11 I will not pretend to have any genuine expertise or experience in properly understanding and predicting a company's inclusion (or exclusion) in the ASX 300.
From the outset, I must also disclose that, for entirely selfish reasons, I am very hopeful that ADN
will be included in the index at the March 2021 re-balance - as I have recently sold down a few not insignificant shareholdings in my industry super fund to free up the capital to buy up ADN shares the moment the fund permits me to do so!
In all seriousness, however, my current feeling is that ADN's inclusion in the ASX300 is far from a "lay down misere" at this point in time, and remains well and truly touch and go. Fingers crossed of course.
If we consider the basis of my view in a little more detail:
1. You can review the S & P / ASX Australian Indices methodology here:
https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-asx-australian-indices.pdfI think we can safely assume that ADN is an eligible stock for inclusion in the index
per se, and hence in broad headings of the criteria for inclusion (as others have already mentioned) appear effectively relate to: (a) market capitalisation; (b) liquidity.
Extracted below is the summary page from the methodology and that explains the criteria in further detail:
2. So if we turn specifically to the issue of market cap, per the link
@rhythm34 usefully provided the other day (thank you for that), it appears ADN may presently be hovering slightly outside the top 300 based on
current market capitalisation alone, albeit is certainly within "striking distance".
https://www.marketindex.com.au/asx-listed-companiesHowever, whether a stock is "institutionally investable" and meets the key market capitalisation requirements is not as straightforward as simply looking at the company's market cap and rather (my emphasis added):
"Except for the S&P/ASX All Technology Index, the market capitalization criterion for stock inclusion is based upon the daily average market capitalization of a security over the last six months. The ASX stock price history (last six months), latest available shares on issue, and the Investable Weight Factor (IWF) are the relevant variables for the calculation. The IWF is a variable that is primarily used to determine the
available float of a security for ASX-listed securities.
"Considering those relevant matters:
a. As we all know, ADN has had a massive rise in share price and market cap over the past 6 months - for instance, in early September 2020 its share price was sitting at
circa $0.06! While I am certainly not complaining in any way shape or form (and indeed the only reason we are even having the discussion about index inclusion is
because of ADN's stellar performance), I think it is reasonable to assume that for the purposes of assessment for ASX300 inclusion, ADN's daily average market capitalisation might be materially lower than where it presently sits.
b. The Investable Weight Factor (IWF) is another complicated issue to consider. The relevant extract from the guidelines is pretty unhelpful (my emphasis added):
"Investable Weight Factor (IWF)
For more information, please refer to S&P Dow Jones Indices’ Float Adjustment Methodolology and S&P Dow Jones Indices’ Equity Policies & Practices Methodology. Exceptions to the standard treatment for the S&P/ASX Indices are detailed below:
Companies in the S&P/ASX indices – with exception of the All Ordinaries – are assigned an Investable Weight Factor (IWF). A company must have a minimum IWF of 0.3 to be eligible for index inclusion, however an IWF at or above that level is not necessary for ongoing index membership."
But looking at this document provides better insight:
So the IWF effectively appears to relate to the "free float" for the company:
"Free float can be defined as the percentage of each company’s shares that are freely available for trading in the
market. It may also be described as the contestable shares in the marketplace for each company.
For S&P/ASX index purposes free float is defined as excluding the following holdings:
- Government and government agencies;
- Controlling and strategic shareholders/partners;
- Any other entities or individuals which hold more than 5% of the stock (excluding insurance companies, securities companies, finance
companies and investment funds such as mutual and pension funds),
and;
- Other restricted portions, such as treasury stocks or strategic holdings."In my respectful view, this is likely to be a big
positive for ADN in terms of index criteria and therefore its IWF should be relatively high (and certainly a lot higher than the minimum free float threshold of 30% for a stock to warrant inclusion in the S & P / ASX indices).
As
@HarryKane commented the other day in relation to the updated Top 20 shareholders list (as at 31 December 2020:
https://www.andromet.com.au/corporate/about-us), the ADN register appears to be "wide open" for institutional investment on market, with only Buratu Pty Ltd (Connolly Super Fund A/C) being a substantial holder above 5% (plus the personal holding of John Connolly, noting the former mentioned super fund would presumably be considered to be his "associate").
I also presume that, say, the shareholdings of the members of ADN's board would also be disregarded in determining ADN's IWF, on the basis these might be deemed as "controlling and strategic shareholders / partners", however, this would arguably seem to leave a significant portion of ADN's issued shares as "freely available for trading in the market".
None of the comments above obviously factor in how ADN"s broad market capitalisation (using the criteria mentioned above) may be placed relative to the other companies that may also be vying for inclusion in the ASX300.
However, as always with these things those that determine index inclusion no doubt retain ultimate discretion and have some mysterious "wild cards" to be able to play. In this regard I note the following S & P commentary as follows (my emphasis added):
- "A representative from Standard & Poor’s is the chairman of the Index Committee. Meetings are held on a quarterly basis as well as on an as needed basis should unusual corporate events warrant.
The Index Committee reserves the right to use discretion to include, exclude, adjust, or postpone the inclusion of a stock, the shares, and the Investable Weight Factor (IWF) of a stock."
- "In times of high volatility t
he current market capitalisation of the stock may also be considered."
All of the above says to me in effect that: (a) the first step is for the relevant criteria to be applied; but that (b) thereafter S & P may apply their discretion to bump up or push down a stock based on what are likely to be somewhat subjective bases. Hence why we can only speculate and there can be no certainty of prediction for a stock in ADN's current position.
3. Next point is around liquidity, and in this regard we need to look at ADN's "relative liquidity" in comparison to its peers.
Relative liquidity = stock median liquidity / market liquidity.
Stock median liquidity is the mediandaily liquidity for each stock over sixmonths. Daily liquidity for each stockis the daily value traded divided byday-end market capitalisation adjustedfor free float.
Market liquidity is determined using theweighted average of the stock medianliquidities of the largest 500 domesticstocks. The six-months average marketcapitalisation used as part of the marketcapitalisation criteria is used forthispurpose.
The market capitalizationweight for stocks in the S&P/ASX 300 is float-adjusted, and ASX300 stocks require a minimum Relative Liquidity of 30% for inclusion. Any stock's Relative Liquidity that drops below half of the 30% threshold becomes ineligibleand is removed at the next rebalancing.
While I am not even going to try express a firm view about this, I again wonder whether this could work against ADN given the stock is very tightly held by a large number of longer term retail shareholders (as we have all commented on regular occasion in this forum). Since the beginning of this year, for example, volume seems to have been pretty light.
4. Finally, it is important to note the concept of "buffers" with respect to ASX300 inclusion or exclusion and in this regard:
"Buffers.
In order to limit the level of index turnover, eligible non-constituent securities will generally only be considered for index inclusion once a current constituent stock is excluded due to a sufficiently low rank and/or liquidity, based on the float-adjusted market capitalization. Potential index inclusions and exclusions need to satisfy buffer requirements in terms of the rank of the stock relative to a given index.
The following buffers aim to limit the level of index turnover that may take place at each quarterly rebalancing, maximizing the efficiency and limiting the cost associated with holding the index portfolio...."
For the ASX300, the rank buffer for addition is 274th by float-adjusted market capitalisation, while the rank buffer for deletion from the index is 326th or lower. Adopting a simplistic approach, it would seem that the current market caps between 274th place (GOR) and 300th (OML) range between about $1.05 billion and $926 million. These are obviously materially higher than ADN's market cap at present. I appreciate that I have not removed ETFs from this rough assessment.
So again, from my perspective these "buffers" raise the bar yet further still in terms of ADN qualifying for inclusion in the ASX300; put more simply, the buffers mean that a stock needs to work extra hard to secure its place at the table, however, it can slack off a little thereafter and still retain its foot in the door.
Conclusion
Having undertaken the review above, my current view is that it is "touch and go" as to whether ADN is included in the ASX300 in the March 2021 rebalance, if not erring on the side of the company possibly not quite making it this time around; which as I said before is not what I want to happen and I will certainly be very pleased indeed if ADN is included.
That said, a lot can happen between now and then (particularly if ADN can release some material price-catalyst news, and most importantly in my view, its mining application will be lodged by 26 February 2021 which is of fundamental importance) and there appears to be a "discretionary" element in the selection process that could potentially favour ADN.
As always, this represents my personal commentary only and it is intended for the interest of ADN's shareholders and discussion within the forum, and is not to be relied on as advice in any form. Please do not make investment decisions based on the information in this post and do your own research.
Best wishes to all, and I look forward to the ASX300 rebalance in March 2021.