S&P outlines index transition

(May 18, 2005) Standard & Poors has released details of the planned transition of the S&P/TSX Composite Index from an equity-only index to one that will include income trusts.

S&P will publish revised rules for index inclusion in June, but the quarterly rebalancing of existing indices will not include trusts. Some details have already been released on these qualifications. To be included in the index trusts must have their debt and equity elements “stapled” together.

Some income products allow for the two elements to be split and traded separately, such as Income Deposit Securities (IDS) and Income Participating Securities (IPS). S&P refers to these as being “paper-clipped” vehicles and will not allow them into the index.

Trusts and limited partnerships (LPs) must be established in Canada to qualify, but LPs may be disqualified if the proposed elimination of foreign property limits does not come to pass.

Companies already included in the TSX which convert to a trust structure will not be excluded from the index, unless they fail to meet existing liquidity and size requirements.

In September of this year, S&P will release two provisional indices. The Provisional S&P/TSX Composite will include income trusts at full-float adjusted weight, along with the Provisional S&P/TSX Income Trust Index, both of which will be published on an end-of-day basis.

At the December rebalancing, the S&P/TSX Composite will include Income Trusts at 50% of the full-float adjusted weight. The trusts in the provisional composite will be added to the Income Trust Index at 50% of full-float adjusted weight. Those trusts in the trust index which do not meet the requirements for composite inclusion will be removed from the Income Trust Index as well.

Also in December, S&P will begin publishing its parallel equity-only index, the S&P/TSX Equity Index.

By the March 2006 rebalancing, the two provisional indices will be terminated and the transition will be complete.

Income Trusts will be included in both the S&P/TSX MidCap and the S&P/TSX SmallCap Indices, but S&P has yet to reach a decision on inclusion to the S&P/TSX 60. In the mean time, trusts will remain excluded from the large cap index.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com