Finally the Straits Times Index gets the revamp that it badly needed. For years I have been writing about how the illiquid Jardine group of stocks have skewed the index, thus presenting an inaccurate, distorted picture of how the local market was performing. This week, Jardine Matheson and Strategic were dropped together with Olam International. It's a welcome move I have to say, one that was long overdue. Note for example, that the MSCI Singapore Free index does not include these stocks.
Jardine was brought into the index back in 1997 when the group switched its listing from HK to Spore following the handover of the former British colony to China. In the beginning there were 5 in the STI - Jardine Matheson, Jardine Strategic, Dairy Farm, Hongkong Land and Mandarin Oriental. The latter was dropped along the way and Cycle & Carriage added, a move which in my view was the start of the criticism of the index, C&C being very thinly traded throughout its tenure as an index member.
In the ensuing years, I had written about the times when the STI hit a certain historic high, explaining that the index reaching that particular milestone should not be interpreted as the market also attaining that milestone. For example, if the index climbed to a multiple-year high, it probably was because the 3-4 Jardine stocks were at an all-time high. As for the rest of the index, they were likely nowhere near a similar high (in one article I remember calculating that the rest of the index was at least 20 per cent below their multiple-year highs, never mind the rest of the market).
Index construction is of course, not an exact science. In some cases, judgement is called for - for example, a stock may meet the liquidity and size requirements on paper but if it is known that their character is suspect or if their governance is poor, that may be grounds for exclusion.
A final word. I think research coverage should be a criteria for index inclusion. ie the stock has to be widely covered and research readily available before it can be considered for index membership.