All Ordinaries Index Essay

Established in January 1980, the All Ordinaries or All Ordinaries Index (known colloquially as the All Ords) is the oldest stock index in Australia, so called because it contains nearly all ordinary (or common) stock listed on the Australian Securities Exchange (ASX). Its creation coincided with the establishment in September 1987 of the then Australian Stock Exchange (now ASX following a merger with the Sydney Futures Exchange in July 2006) from six separate state-based exchanges in the capital cities of Sydney, Melbourne, Brisbane, Perth, Adelaide, and Hobart.

Like all market indexes, the All Ordinaries is a summary measure of the movement of stock values that result when stock in companies held by individual and corporate stockholders trade on the ASX. It is useful as an indicator of overall share market performance and current trends. It also provides a performance benchmark for invested funds, a record of market cycles, and an indicator of stock market reactions to economic events. As a market index, the All Ordinaries is helpful in the construction of asset pricing models, like the capital asset pricing model (CAPM), where the All Ordinaries serves as the market factor and is used to calculate beta (the sensitivity of a stock’s return to market or systematic or nondiversifiable forces). Daily data on the All Ordinaries for these purposes is available since 1980; movements before 1980 have been recalculated using changes in the older state-based indices (mostly the Sydney Stock Exchange). Reconstructed daily observations for the All Ordinaries from January 1958 and backdated monthly data from October 1882 are now available.

When established, the All Ordinaries had a base index of 500—28 years later in December 2007 the All Ordinaries was at 6,421, meaning that it had increased more than twelvefold in nominal terms (that is, not accounting for inflation). This represents an arithmetic return of 1,184 percent and a compound annual return of 9.54 percent. On November 1, 2007, the All Ordinaries hit a record high of 6,873. However, on January 22, 2008, the All Ordinaries plunged 408.9 points (7.26 percent) to 5,222, its fourth-worst day on record and worst performance since October 29, 1987, when it fell 7.52 percent. Since then, it has partially recovered, and as of June 6, 2008, stands at 5,633.

On April 3, 2000, the ASX reconstituted the All Ordinaries from a pool of 229–330 stocks to include the 500 largest companies. Prior to this change, to be included in the All Ordinaries portfolio used for calculating the index a company needed to have a market value of at least 0.2 percent of all domestic equities quoted on the ASX and maintain an average turnover of at least 0.5 percent of its quoted shares each month. The new index now accounts for about 99 percent (up from 90 percent) of the ASX’s total market capitalization. This change coincided with the introduction of new benchmark indexes managed by Standard and Poor’s (S&P), including the S&P/ASX 300 (i.e., the 300 largest companies listed on the ASX), S&P/ASX 200, S&P/ASX 100, S&P/ASX 50, S&P/ASX 20, and the S&P/ASX Small Ordinaries (i.e., small and medium sized companies). The importance of the All Ordinaries has diminished with the introduction of the new S&P/ASX indexes.

The All Ordinaries is a market-weighted (or capitalization-weighted) index where stocks are included in the index according to the total market value of their outstanding shares. As a result, the impact of a stock’s price change is proportional to the company’s overall market value, which is the share price times the number of shares outstanding. Stocks in companies with a larger market capitalization will then exert a proportionally greater influence on the market index. Most stock indexes today are market-weighted; they include the S&P 500 and the Dow Jones Wilshire 5000 in the United States, the Financial Times Stock Exchange (FTSE) 100 in the United Kingdom, and the Tokyo stock Price IndeX (TOPIX) in Japan. Some other indexes are price-weighted where each stock makes up a fraction of the index proportional to its price. This means that stocks are included in proportions based on their quoted prices. Accordingly, higher priced stock will exert the most impact on the index. Examples of price-weighted indexes include the Dow Jones Industrial Average (DJIA) in the United States and Japan’s Nikkei 225.

In terms of calculation, the All Ordinaries represents the aggregate market value of the ASX. The aggregate market value is the sum of the market values (the number of shares on issue multiplied by the current price per share) of all companies included in the All Ordinaries portfolio. Today’s movement in the index is then calculated by multiplying yesterday’s index by the ratio of today’s to yesterday’s aggregate market values. Updates to the companies included in the All Ordinaries portfolio are made throughout the month when there are changes in the portfolio companies, including delistings, additions, capital reconstructions, and additions through dividend reinvestment plans and bonus and rights issues. These changes affect the number of shares on issue for each company and mean that the portfolio needs modification to maintain consistency.

The main limitation of the All Ordinaries is that it is a price index: it only includes movements in stock prices. However, investors accrue returns not only through price changes, but also through the receipt of dividends; hence, the All Ordinaries understates the total return to the investor. To resolve this, an All Ordinaries Accumulation Index is available that includes the effects of dividend receipts in its computation by assuming that dividends are reinvested to earn the same returns as the stock already held.

 

Bibliography:

  1. Australian Securities Exchange, www.asx.com.au (cited March 2009).

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