Using PSEi as a Benchmark

what is compound interest and how does it work security bank philippines

Last time, we discussed about Benchmarks. One of the Benchmarks financial managers and investors use is the PSEi. But what is PSEi, exactly?

What is an Index?


Before we discuss the PSEi, what is an Index? An Index is a method to track the performance of a group of assets in a standardized way. It measures the performance of the basket of securities that represent a certain market. 

What is the PSEi?


The Philippine Stock Exchange Index or PSEi is the main Index in the Philippines. The name PSEi was adopted by the Exchange in April 2006. In the past, various labels were used to refer to the Exchange’s main index, such as the Phisix and the PSE Composite Index. It is composed of a fixed basket of 30 companies whose selection is based on a specific set of criteria. The PSEi shows the market’s condition by measuring the changes in the stock prices of select listed companies. It is used as a barometer for the  Philippine Stock Market, in general.  Among the 30 largest and most common stocks included in the PSEi are Ayala Corporation,  Jollibee Foods Corporation, Manila Electric Company, PLDT Inc., Monde Nissin Corporation, and Universal Robina Corporation, to name a few.   

To track the performance of specific sectors of the market, the PSE also maintains six sector indices representing each major sector under the industry classification of the Exchange. These indices are the following:

Financials Index, Industrial Index, Holding Firms Index, Property Index, Services Index, Mining and Oil Index.

Who manages the PSEi?


The Philippine Stock Exchange (PSE) manages the PSEi. The Philippine Stock Exchange, Inc. (PSE) is a self-regulatory organization that provides and ensures a fair, efficient, transparent and orderly market for the buying and selling of securities. Aside from managing the PSEi, PSE is the regulatory body of the stock market in the Philippines. PSE provides listing, trading, market data, clearing, and settlement services among others. Formed thru the unification of Manila Stock Exchange and Makati Stock Exchange in 1992, PSE is considered as one of the oldest bourses in Asia.

How does the PSEi select stocks?


PSE has set a criterion for all stocks listed in the market. PSE will rebalance the basket of securities once any of the criterion are not met. The criterion is mentioned below:

Eligible Securities

  • A company should be listed for at least 12 months and is compliant to the free float and liquidity requirements.
  • Foreign companies listed in other exchanges abroad, Convertible preferred shares, Exchange Traded Funds, Dollar Denominated Securities are ineligible. Companies shall be considered ineligible due to conditions that may cause their stocks to be unavailable for trading for a significant period for the next six months from the scheduled review of the indices.

Free Float

  • Only the free float shares of a company are factored in when computing the indices. Free float, also known as public float, refers to the portion of the outstanding shares that are freely available and tradable in the market, or those shareholdings which are non-strategic in nature.
  • A company’s free float shares must be at least 15% of its outstanding shares at the end of the 12-month period in review. But by December 2022, the outstanding shares should be at least 20%.

Liquidity

  • Each company will be tested for liquidity by computing its median daily trading value for each month of the twelve-month period in review.
  • To be eligible for the PSEi, the stocks of the company must rank among the top 25% in terms of median daily trade per month in nine out of the twelve-month period in review.
  • To be eligible for the sector indices, the stocks of the company must rank among the top 50% in terms of median daily trade per month in eight out of the twelve-month period in review.

 Companies that pass the requirements above are ranked from highest to lowest according to their full market capitalization. The 30 largest companies based on full market capitalization are to be included in the PSEi. The weight of their exposure to PSEi is based on their market capitalization also.

How will the PSEi help you with your investment decision?


Since PSEi represents the movement of the  Philippine stock market, an investor can use it as a  Benchmark for their equity portfolio. It can be used as a guide on where to invest and what stocks to pick. The PSEi is calculated every minute. It can help an investor to decide whether to buy or sell in a  timely manner. It shows if a specific stock or sector is performing better or worse than the others. There are also products in the market that tracks PSEi. One of those investment options is our SB Philippine Equity Index Fund. This Index fund aims to achieve income growth and investment returns that closely track the total return of PSEi. The Fund mimics the stocks in the PSEi using the same weights as the index*. This is perfect for investors who would rather have their funds managed by a professional Fund Manager.

But how will you know if your portfolio is performing better than PSEi? The comparison should be apples to apples. First, your portfolio must be purely equities and investment options should be limited to member stocks of the PSEi. Second, your timeline should be the same. If your Return on Investment is computed Year-to-Date, the PSEi that you should get must be the same period as well.

Take this as an example:
The ROI of your portfolio as of June 30, 2022, is -5.0%. The fiscal year is December 31. Since it is YTD and as of June 30, 2022, we will get the PSEis for Dec 31, 2021, and June 30, 2022.

Date PSEi
12/31/2022 7,122.63
6/30/2022 6,155.43
  -13.58%

As you can see, the return of PSEi is -13.58% [(6,155.43/7,122.63)-1]. Your portfolio’s ROI might be negative but is still performing better than its benchmark by 8.68%. (-5.00% – 13.58%). This might be because you are overweight in performing sectors say in financial sectors, or you have an overweight position in specific stocks vs. the PSEi.

 

 

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