A study on sector index of stock market proposal for development of FPTS sector index : Luận văn ThS. Kinh doanh và quản lý: 60 34 05

vietnam national university, HANOI school of business Nguyen Minh Khoi A STUDY ON SECTOR INDEX OF STOCK MARKET PROPOSAL FOR DEVELOPMENT OF FPTS SECTOR INDEX master of business administration thesis Hanoi - 2008 vietnam national university, HANOI school of business Nguyen Minh Khoi A STUDY ON SECTOR INDEX OF STOCK MARKET PROPOSAL FOR DEVELOPMENT OF FPTS SECTOR INDEX Major: Business Administration Code: 60 34 05 Master of business administration thesis Supervisors: DR TRAN doan Kim Tran Phuong Lan, MBA, Ph.D candidate Hanoi - 2008 TABLE OF CONTENTS ABSTRACT i TÓM TẮT ii ACKNOWLEDGEMENTS iii TABLE OF CONTENTS iv List of figures viii List of tables viii List of equations ix INTRODUCTION 1.1 Research problem 1.2 Objectives &Aims 1.2.1 Objectives 1.2.2 Aims 1.3 Research question: 1.4 Method/Approaches 1.5 Scope of work 1.6 Data resources 1.7 Method 1.8 Significance 1.9 Limitations 1.10 Expected result: 1.11 Follow – up (potential) 1.12 Short introductions 1.12.1 Chapter 1: Theory foundation 1.12.2 Chapter 2: Analysis of sector indices 1.12.3 Chapter 3: proposal for developing FPTS sector index Chapter 1: THEORY FOUNDATION 1.1 Introduction 1.1.1 Definition of market index and sector index 1.1.2 Type of market indices 1.1.2.1 By industry (Sector indices) 1.1.2.2 By geographic location 1.1.2.3 By the nature of index members 1.1.2.4 By market capitalization (size) iv 1.1.2.5 By style (value or growth) 1.1.2.6 By dividend (dividend indices) 1.1.2.7 By combination of the above characteristics 1.2 Sector index applications 1.2.1 Sector monitoring and determining sector trend 1.2.2 Creation of index-linked investment products 1.2.3 Precise asset allocations 1.2.4 Hedge economic risk 1.2.5 Sector investing 10 1.2.5.1 Increase returns and reduce the overall risk of a diversified portfolio 10 1.2.5.2 Take advantage of long-term trends 10 1.3 Sector indices calculation 11 1.3.1 Step 1: Calculation methods 11 1.3.1.1 Passcher method 11 1.3.1.2 Laspeyres method 12 1.3.1.3 Fisher method 12 1.3.1.4 Simple arithmetic price average 13 1.3.1.5 Simple geometric price average method 13 1.3.1.6 Comparison of index calculation method 14 1.3.2 Step 2: Members selection 14 1.3.3 Step 3: Divisor adjustment 15 1.3.3.1 Reasons for divisor adjustment 15 1.3.3.2 Divisor adjustment formula 16 1.3.3.3 Timing of divisor adjustments 17 1.3.4 Step 4: Index calculation 18 Chapter 2: ANALYSIS OF SECTOR INDICES 19 2.1 Analysis of international sector indices 19 2.1.1 S&P select industry indices 19 2.1.1.1 Index Description 19 2.1.1.2 Sector classification system 19 2.1.1.3 Index membership 19 2.1.1.4 Index calculation 21 2.1.2 Dow Jones U.S Industry Indices 22 2.1.2.1 Index description 22 2.1.2.2 Sector classification system 22 2.1.2.3 Index membership 23 v 2.1.2.4 Index calculation 23 2.1.3 NASDAQ Financial-100 Index 23 2.1.3.1 Index Description 23 2.1.3.2 Sector classification system 24 2.1.3.3 Index membership 24 2.1.3.4 Index calculation 25 2.1.4 MorningStar sector Indices 26 2.1.4.1 Index description 26 2.1.4.2 Sector classification system 26 2.1.4.3 Index membership 27 2.1.4.4 Index calculation 28 2.1.5 NYSE Sector Indices 29 2.1.5.1 Index description and sector classification system 29 2.1.5.2 Index membership 30 2.1.5.3 Index calculation 31 2.1.6 Comparison and conclusion of international sector indices 32 2.1.6.1 Comparison 32 2.1.6.2 Conclusion 33 2.2 Analysis of local sector indices 34 2.2.1 VN – Index and HASTC Index 34 2.2.1.1 Index description 34 2.2.1.2 Index membership and calculation 35 2.2.2 CBV Index 37 2.2.2.1 Index description 37 2.2.2.2 Index Membership 40 2.2.2.3 Index calculation 42 2.2.3 DC 30 Index 43 2.2.3.1 Index introduction 43 2.2.3.2 Index membership and calculation 44 2.2.4 Thang Long 20, 30 Index 46 2.2.4.1 Index description 46 2.2.4.2 Index Membership 46 2.2.4.3 Index calculation 47 2.2.5 SSI 30 Index 48 2.2.5.1 Index description 48 2.2.5.2 Index membership and calculation 49 vi 2.2.6 Local indices comparison 50 2.2.7 Drawbacks of local indices 52 2.2.7.1 Drawbacks of VN-Index and HASTC index 52 2.2.7.2 Additional drawbacks of other local index 54 Chapter 3: PROPOSAL FOR DEVELOPING FPTS SECTOR INDEX 55 3.1 Introduction and Objectives 55 3.2 Methodology 55 3.2.1 Sector classification system 55 3.2.2 Base value and base date 56 3.2.3 Weighting scheme 56 3.2.4 Index formula 56 3.2.5 Data sources 57 3.3 Index memberships 58 3.3.1 Index eligibilities 58 3.3.2 Additions to and deletions from FPTS sector indices 59 3.3.2.1 Additions to FPTS sector indices 59 3.3.2.2 Deletions from FPTS sector indices 60 3.3.3 3.4 Member selection flowchart 61 User requirement description (URD) 62 3.4.1 Back-end user requirements 62 3.4.2 Front –end user interface and functionalities 62 3.4.2.1 Page layout and elements 63 3.4.2.2 Prototype of FPTS sector index homepage 64 3.4.2.3 Prototype of FPTS sector index sectorpage 65 3.4.2.4 Prototype of FPTS sector member page 66 CONCLUSION 67 REFERENCES 68 vii List of figures Figure 1.1: Steps to calculate indices includes major steps 11 Figure 2.1: Summary of Morningstar sector index family 27 Figure 2.2: CBV Index family 37 Figure 2.3: CBV Sector Index family 39 Figure 2.4: DC VN30 Domestic performance vs VNINDEX 44 Figure 2.5: DC VN30 Foreign performance again 44 Figure 2.6: SSI 30 performance in 2007 49 Figure 3.1: Procedure to select stocks to FPTS sector index 61 Figure 3.2: Page layout of FPTS sector indices pages 63 Figure 3.3: Prototype of FPTS sector index homepage 64 Figure 3.4: Prototype of FPTS sector index sector page 65 Figure 3.5: Prototype of FPTS sector member page 66 List of tables Table 1.1: Divisor adjustment formula table 16 Table 2.1: Comparison of international sector indices 32 Table 2.2: Top 10 companies in DC VN30 45 Table 2.3: Thanglong Index scoring table 47 Table 2.4: Local indices comparison 50 Table 3.1: Major element and content of FPTS sector indices 63 viii List of equations Equation 1.1: Passcher method formula 11 Equation 1.2: Laspeyres method formula 12 Equation 1.3: Fisher method formula 13 Equation 1.4: Simple arithmetic price average formula 13 Equation 1.5: Simple geometric price average formula 13 Equation 1.6: Index calculation formula 18 ix A study on sector index of stock market - proposal for development of FPTS sector index INTRODUCTION 1.1 Research problem One of the most widely used tools to track industry or sector performance in the securities market is sector indices These are the essential tools for investors to follow up sector movements as well as to see the trend in those movements However, the securities market of Vietnam still lacks of an comprehensive and effective sector indices tools since the official market indices of the securities market of Vietnam (VN-Index and HASTC-Index) are to measure the overall market performance rather than any particular sector This thesis ―A study on sector index of stock market and proposal for development of FPTS sector index‖ is aimed at give out a detailed proposal for the development of FPTS sector indices 1.2 Objectives &Aims 1.2.1 Objectives  Study sector index definitions  Study sector index application and calculation methodology  Compare and analyze most known international and local sector indices 1.2.2 Aims Give out detailed proposals for the development of FPTS sector index family A study on sector index of stock market - proposal for development of FPTS sector index 1.3 Research question: In order to achieve the objectives of the thesis, the author of thesis will try to answer the following questions:  What are definition, types and applications of sector indices?  What are the calculation methods of sector indices?  What are the most known international and local sector indices? What are the differences and similarities among them?  How to select members of FPTS sector indices?  How to calculate FPTS sector indices?  What are the core FPTS sector back-end functionalities and frond-end interfaces (user requirement description)? 1.4 Method/Approaches  Empirical method  Approaches: statistics 1.5 Scope of work This thesis study most widely mentioned sector indices (both international and local) by the time of finishing this thesis (August, 2008) 1.6 Data resources Data and material for this study will be taken from different sources as following:  Database and working papers from FPTS analyst department A study on sector index of stock market - proposal for development of FPTS sector index Chapter 3: PROPOSAL FOR DEVELOPING FPTS SECTOR INDEX 3.1 Introduction and Objectives FPTS sector index are aimed at overcoming the drawbacks of other local indices and providing investors with a very powerful tools for their investment In particular, FPTS sector index family is constructed with the following objectives: To monitor stock price movements within sectors To select sectors for investment purpose To compare the performance, returns and variability of a stock or a group of stocks against a sector or a group of sectors FPTS sector index is a set of sector index for the Vietnam stock market including both HOSE and HASTC FPTS sector index is being developed by FPT securities joint stock company (FPTS) As the continuation of chapter about sector index theory and chapter about analyst of current sector indices, this chapter presents detailed proposal for developing successful sector indices in Vietnam with the case of FPTS sector index 3.2 Methodology 3.2.1 Sector classification system FPTS sector index family consists of a comprehensive set of indices constructed for 18 sectors that are categorized using ICB (Industry Classification Benchmark) standards 55 A study on sector index of stock market - proposal for development of FPTS sector index 3.2.2 Base value and base date The base value of FPTS sector index family is 100 The base date of FPTS sector index family is January st 2007 This is the date that Vietnam’s Law on Securities came into effect The Law on Securities is considered one of the basic legal frameworks, laying the groundwork for long-term and sustainable development of Vietnam’s equity market At the base date, divisor D0 is equal to 1/100 of the total market capitalization’s base value The total market capitalization’s base value is calculated using the number of outstanding shares and closing prices of all the component stocks at the base date 3.2.3 Weighting scheme FPTS sector indices are weighted by market capitalization This is also the methodology widely employed in Vietnam and in the world 3.2.4 Index formula Formula for FPTS sector index at time t: FPTS Sector Indext= Mt/Dt Where: Mt: Total market capitalization at time t of all the stocks in the index Specifically: Mt= in which:  n: number of stocks in the index  i: a variable that takes value from to n  t: time when the index is calculated  Pit: price of stock i at time t  Qit: number of shares of company i at time t Dt: divisor at time (t) 56 A study on sector index of stock market - proposal for development of FPTS sector index The market capitalization of component stocks in the index is affected by a variety of corporate actions, such as dividend payment, rights offering, merger and acquisition The addition and deletion of a stock in sector indices also affect the index value Therefore, in all cases when index value changes due to changes in index composition or corporate actions, divisor adjustments are required so as to maintain index continuity The divisor adjustment rule is to equalize the index value before and after the event The following formula is used for divisor adjustment: Where t+1: event date Dt: divisor at time (t) Dt+1: divisor at time (t+1) This divisor is calculated in the database after the market closes on date (t) Mt: total market capitalization at time t of all the stocks in the index Mt+1 estimated: total market capitalization at time (t+1), estimated based on closing prices of component stocks on date t (adjusted using the formulas in section 1.3.3.2 Divisor adjustment formula on page 16) and number of outstanding shares on date t (adjusted using the formulas in section 1.3.3.2 Divisor adjustment formula on page 16) 3.2.5 Data sources Stock trading statistics (including prices, number of outstanding shares, trading volumes) are obtained directly from Ho Chi Minh Stock Exchange (HOSE) and Hanoi Securities Trading Centre (HASTC) 57 A study on sector index of stock market - proposal for development of FPTS sector index Other information related to listed companies used for FPTS sector index calculation (such as information on rights exercise) is taken from official and reliable sources such as the State Securities Commission, HOSE, HASTC and listed companies The information is consolidated on FPTS’s online information gateway EzSearch FPTS sector index committee will employ all resources and measures with best efforts to ensure the accuracy, completeness and timeliness of input data used in FPTS sector index calculation All errors in input data or in FPTS sector index construction methodology (if any) will be informed immediately after being detected, accompanied by reasons for errors 3.3 Index memberships 3.3.1 Index eligibilities To be eligible for inclusion in FPTS sector indices, stocks must meet the following criteria arranged by their priority level: Listing venue: The stocks must be listed on Ho Chi Minh Stock Exchange (HOSE) or Hanoi Securities Trading Centre (HASTC) Stock count: Each sector index must have a minimum of constituents If there are fewer than stocks in a sector, this sector index will include all stocks in the sector Liquidity: Constituents must have a liquidity ratio – defined by total trading volume over the previous 12 months divided by average number of outstanding shares over the previous 12 months – at least 20% For stocks that not have 12 months of trading history (for example, newly listed stocks), we use annualized trading volume 58 A study on sector index of stock market - proposal for development of FPTS sector index Market capitalization: Stocks that meet the liquidity threshold are included in the sector index in order of their market capitalization until the total cumulative market capitalization of these stocks reaches 80% of the total market capitalization of the entire sector Stocks with market capitalization reaching at least 10% of the total market capitalization of the entire sector will be included in the corresponding sector index, without regards to their liquidity ratios The following securities are not eligible for inclusion in FPTS sector indices:  OTC-traded securities  Preferred stocks  Derivative securities and closed-end funds  Securities which experience considerable structural changes or are subjects of M&A, divestiture or spin-offs or bankruptcy 3.3.2 Additions to and deletions from FPTS sector indices Additions to and deletions from FPTS sector indices are done quarterly, specifically at the last trading day of March, June, September and December each year Updated information will be announced in one week as the latest on FPTS’s website and in our quarterly reports 3.3.2.1 Additions to FPTS sector indices FPTS index committee will consider additions to FPTS sector indices quarterly, based on this methodology guide as well as judgment for certain cases FPTS index committee will announce reasons for additions to FPTS sector indices 59 A study on sector index of stock market - proposal for development of FPTS sector index To be eligible as additions to FPTS sector indices at each quarterly index reconstitution date, a stock must meet the following criteria:  The stock is recently listed in the quarter and had a minimum of trading months or the stock is not included in FPTS sector indices at prior quarterly index reconstitution dates, and  The stock meets all stock selection criteria 3.3.2.2 Deletions from FPTS sector indices FPTS index committee will consider deletions from FPTS sector indices quarterly, based on this methodology guide as well as judgment for certain cases FPTS index committee will announce reasons for deletions from FPTS sector indices A stock in FPTS sector indices will be considered for being deleted from the indices when it violates any of the criteria for inclusion in FPTS sector indices 60 A study on sector index of stock market - proposal for development of FPTS sector index 3.3.3 Member selection flowchart PROCEDURE TO SELECT STOCKs TO FPTS SECTOR INDECIES Steps BEGIN Step If no of sock in the corresponding super sector =30% into Group 1; Group stocks with liquidity ratio = No Bring Group to Basket Bring Group to Basket Carry out Step No Bring Group to Basket Bring Group to Basket Carry out Step Yes Step If Total Mkt Cap of group >= 90% Total Mkt Cap of Super Sector Yes Step Step Step Bring Group to Basket Sort stocks in Group in ascending order of market cap Bring stock one by one from top to bottom out of Group as long as the following conditions are satisfied: Sum of no of stock in basket and basket >=5 Sum of Total Market Cap of basket and >= 90% total market cap of Super Sector This procedure stops right before either the above conditions are violated Step 10 Bring all remaining stock in basket and to Sector Index Step 11 END Figure 3.1: Procedure to select stocks to FPTS sector index 61 A study on sector index of stock market - proposal for development of FPTS sector index 3.4 User requirement description (URD) 3.4.1 Back-end user requirements The back-end of FPTS sector index should include the following modules No Module name Event Setup Sector Calculate Index Data center Purpose Input and follow up corporate events Select sector member Calculate sector indices in a period of time Import, update and maintain the database (including historical price and outstanding share of stocks in both exchanges) 3.4.2 Front –end user interface and functionalities The front-end of user interface is a web-based interface with levels of webpage  Level 1: the homepage of FPTS sector index with an overview of the latest changes in all sector indices  Level 2: sector page: Every sector will have a dedicated webpage with details about sector index constituents 62 A study on sector index of stock market - proposal for development of FPTS sector index 3.4.2.1 Page layout and elements Figure 3.2: Page layout of FPTS sector indices pages Table 3.1: Major element and content of FPTS sector indices No Elements Contents Location vertical menu including list Menu of sector and other important bar contents Menu bar Plotting VN-Index, HASTC – Index and FPTS composite Column Graph index and Hot, breaking news or News General economic news Present important statistics related to FPTS composite index and FPTS sector Statistics indices Functionality Can be a tactic or dynamic menu (auto collapseexpand) Should be concise, fit into column not too crowded Present lead-in only and a Column link to source Presented in column or column 63 A study on sector index of stock market - proposal for development of FPTS sector index 3.4.2.2 Prototype of FPTS sector index homepage Related Graph area news Menu bar area Important statistics Source: FPT securities company Figure 3.3: Prototype of FPTS sector index homepage 64 A study on sector index of stock market - proposal for development of FPTS sector index 3.4.2.3 Prototype of FPTS sector index sectorpage Source: FPT securities company Figure 3.4: Prototype of FPTS sector index sector page 65 A study on sector index of stock market - proposal for development of FPTS sector index 3.4.2.4 Prototype of FPTS sector member page Source: FPT securities company Figure 3.5: Prototype of FPTS sector member page 66 A study on sector index of stock market - proposal for development of FPTS sector index CONCLUSION The securities market of Vietnam from October 2007 to June 2008 suffered from one of the most severe plunge in its history with a slash of 2/3 value from over 1100 to 366 point However, together with the Vietnamese dynamic and active economy, the long-term growth of the securities market of Vietnam is strong and determined To able to tap into market opportunities as well as avoid risk, investors should be equipped with effective and strong tools FPTS sector indices will be a tool of that kind With this thesis I hope that I have provided reader with some light on the nature and characteristics of indices and sector indices in particular, deep analysis on the current most notable international and domestics sector indices and a detailed prototype of a new, comprehensive sector indices which can be beneficial for individuals who want to study more about this subject as well as for organizations who want to develop an index for their own Implications for further research Further study can also be carried out to adjust and fine-tune the backend functions and front-end user interface and functions after the official launch of FPTS sector indices and receiving the feedback from the customers 67 A study on sector index of stock market - proposal for development of FPTS sector index REFERENCES Vietnamese Trí Dũng, (2007), ―HASTC-Index: Kim nam hướng Bắc‖, Báo đầu tư chứng khoán issue 25, October, 2007 CBV (2007), ―Phương pháp luận số CBV‖, Article, http://www.cbv.vn/ Thang Long Securities Company (2008), ―Danh mục số Thăng Long – Bản giới thiệu dịch vụ phục vụ nhà đầu tư TSC‖, Article, http://www.thanglongsc.com.vn Vietstock, (2008), ―Cách tính số chứng khoán VN Index Việt Nam‖, Article, http://www.vietstock.com.vn English Down Jones Index (2006), ―Dow Jones U.S Industry Indices Factsheets‖, Article, www.djindices.com Nasdaq (2008), ―NASDAQ Financial-100 Index Methodology‖, Article, http://www.nasdaq.com/ NYSE (2004), ―NYSE Sector Indices Methodology Guide‖, Article, www.nyseindices.com Russell index (2007), ―Russell U.S Equity Indices Construction and Methodology‖, Article, www.russell.com/indices SSI (2007), ―SSI30 – the market zoomed in‖, Article, http://ssi.com.vn/ Standard and Poor’s (2007), ―S&P select industry indices methodology‖, Article, www.indices.standardandpoors.com Van Kampen Investments (2005), ―Dow Jones U.S Total Market and Economic Sector Index Summary‖, Article, www.djindices.com 68 A study on sector index of stock market - proposal for development of FPTS sector index Websites: o www.russell.com/indices o www.djindices.com o www.indices.standardandpoors.com o http://www.nasdaq.com/ o www.nyseindices.com o http://www.thanglongsc.com.vn o www.ssi.com.vn o http://www.dragoncapital.com/ o http://www.hsx.vn o http://hastc.org.vn o www.vietstock.com.vn o www.google.com 69