Top 10 STI Constituents (Source: FTSE Russell Factsheet 31 Mar 2020)

Why this matters?
As many strategies (ETFs, Index-tracking funds, structured products) are benchmarked against it, when a constituent stock is replaced, index funds that track the STI would have to sell off their holdings in the stock that is removed and buy the stock that is added. This flow of funds can depress the stock price for the removed stock and vice versa for the added stock.

The most recent example of this happened in Dec19 when Mapletree Logistics Trust (MLT) replaced Golden Agri (GGR) in the STI on 23rd Dec 2019; this was announced on 5th Dec 2019. The day before the announcement, MLT closed at $1.70. 2 months later in mid-Feb, MLT was up ~19% to $2.02.

STI Dec 2019 change (Source: FTSE Russell)

How the review is done
According to the STI ground rules (link here), the STI constituent review will happen quarterly in Mar/Jun/Sep/Dec. The review will be based on data from the close of business on the Monday 4 weeks prior to the review effective date. This review effective date will be after the close of business on the third Friday of the month.

To be inserted into the STI at the quarterly review, a company has to be at least 20th position by full market cap. For deletion, it has to fall to 41st position or below by full market cap. A company can also be removed from the STI if it is subject to a takeover and will be delisted. In this scenario, the vacancy will be filled by the highest ranking security by full market cap in the Reserve List. The reserve list is currently made up of Mapletree Industrial Trust, Suntec REIT, Keppel REIT, Mapletree North Asia Commercial Trust and NetLink NBN Trust.

Potential additions/deletions?
In 2019, 2 REITs, Mapletree Commercial Trust and Mapletree Logistics Trust were added in Sep and Dec respectively. This was a function of the REIT bull-run in 2019 and also aided by the fading fortunes of Hutchison Port Holdings Trust and Golden Agri, which were replaced. The reserve list currently has 5 REIT/BTs which could potentially be added. Based on a quick check, none of the 5 reserve list stocks are within the top 20. However, it is interesting to note that all 5 are ranked higher than SPH (ranked 42nd) and Sembcorp Industries (ranked 38th). Additionally, as SPH ranks 42nd, it would qualify for deletion if the cut off date was today!

According to FTSE Russell, where a greater number of companies qualify to be deleted (SPH in this case) than those qualifying to be inserted (none in this case), the securities of the highest ranking companies that are presently not included in the index will be inserted to match the number of companies being deleted at the quarterly review. In effect, this could mean that Mapletree Industrial Trust could be included despite not having met the criteria of being the top 20 market cap stock; MINT was only ranked 25th.

Ranking of top 50 SGX stocks by market cap

Another deletion on the cards would be that of Capitaland Commercial Trust (CCT), which will be merged with Capitaland Mall Trust (CMT). According to reports, the expected completion is the merger is mid2020; assuming some delays to 3Q2020, this would be in time for the Sep20 review. According to FTSE, when one constituent in the STI is absorbed by another, the vacancy created will be filled by selected the highest-ranking security by full market cap in the reserve list. After MINT potentially goes off the Reserve List in Jun20, the next in line would be Keppel DC REIT!

Conclusion
Jun20 - SPH (out), MINT (in)
Sep20 - CCT (out), KDCREIT (in)
The covid-19 induced market turmoil looks to be throwing up some interesting index changes. I am also unsure whether there will be any support from the SPH shareholders to ensure they remain in the index. Weirdly enough, SPH is the creator of the STI index together with SGX and FTSE Russell. On the other side, this further reinforces the positive sentiment surrounding the 2 data-centre linked REITs.