The methodology of the S&P BSE SENSEX has seen many changes over the last 30 years. In October 2018, it was again modified after an extensive market consultation.
The recent changes brought new clarity to the boundaries for entry and exit of stocks in the index. Constituents are selected by size and liquidity. Now, any constituent with a free-float market cap rank beyond 39 will be dropped from the index and any non-constituent with a rank equal to or less than 21 will qualify for inclusion in the index. This helps the S&P BSE SENSEX methodology become rules-based, transparent, and objective.
Using the new methodology as a part of the semiannual index reconstitution, Asia Index Private Ltd (a joint venture between S&P Dow Jones Indices and BSE Ltd) announced changes to the S&P BSE SENSEX composition on November 22, 2018. Bajaj Finance (a leading non-banking finance company company) and HCL Technologies (a leading global information technology company) replaced Wipro and Adani Ports and Special Economic Zone (see Exhibit 1). These changes were effective as of the market open on December 24, 2018.
The S&P BSE SENSEX noted total returns of 7% over the three months since the previous rebalance. During this period, new members Bajaj Finance and HCL Technologies outperformed the index by 2.5% and 0.6%, respectively, on a total returns basis. Good though this outperformance is, it had a minor effect of 0.27%, combined, on the index’s total return, on account of the two new companies’ small weight in the index.
|Exhibit 1: Return Characteristics of S&P BSE SENSEX Constituents|
|INDEX MEMBERSHIP ACTION||STOCK NAME||WEIGHT (%)||TOTAL RETURN (%)||CONTRIBUTION TO S&P BSE SENSEX TOTAL RETURN (%)||GICS® SECTOR||RESPECTIVE SECTOR INDEX PERFORMANCE
|—||S&P BSE SENSEX TR||—||7.00||—||—||—|
|Inclusion||Bajaj Finance Ltd||1.69||9.47||0.16||Financials||7.12|
|Inclusion||HCL Technologies Ltd||1.47||7.58||0.11||Information Technology||9.81|
|Exclusion||Wipro Ltd||1.01||9.01||NA||Information Technology||9.81|
|Exclusion||Adani Ports And Special Economic Zone Ltd||0.79||0.32||NA||Industrials||-0.49|
Source: Bloomberg and Asia Index Private Limited. Contribution and total returns from Dec. 21, 2018, to March 22, 2019. Weight as of rebalance as of Dec 21, 2018. Past performance is no guarantee of future results. Table is provided for illustrative purposes.
Historically, India’s equity market has been dominated by the Financials sector, and this is also true of the S&P BSE SENSEX. The weight of Financials in the index before the October 2018 changes was 41.5%. It increased by 1.3% to 42.8% on account of the inclusion of Bajaj Finance. The Industrials sector noted a fall of 0.9% in sector weight with the exclusion of Adani Ports and Special Economic Zone.
|Exhibit 2: GICS Sector Weights since S&P BSE SENSEX Methodology Change|
|GICS SECTOR||OLD WEIGHTS (%)||NEW WEIGHTS (%)||CHANGE (%)|
Source: Asia Index Private Limited. Weights as of Dec. 21, 2018. Table is provided for illustrative purposes.
The S&P BSE SENSEX, India’s most tracked bellwether index, is designed to measure the performance of the 30 largest, most liquid, and financially sound large-cap companies across key economic sectors of the Indian economy. The index represents approximately 44% of BSE-listed companies in terms of total market capitalization. It follows a free-float-adjusted, market-cap-weighted methodology and is reviewed semiannually in June and December.