ASOS PLC (LON: ASC) announced yesterday that it is to leave AIM, where it has been for 20 years and where it is the largest market capitalisation, to move up to the main market. This will mean, probably in February, inclusion in the FTSE250 index. This could lead to a trading opportunity around a FTSE250 involved revaluation.
We discussed ASOS’ trading update yesterday so this is not about the business, trading results or profit forecasts. Such matters as how ASOS will benefit from the end of lockdown, or suffer from it, are not the point here. Rather, this is about a known market imperfection that it might be possible to trade.
Being on AIM has brought certain benefits to ASOS. The listing is less expensive than the main market for example. There are significant tax benefits for UK resident shareholders in being on AIM as well. Listing expenses for a company of ASOS’s size are not really relevant anymore given ASOS’s growth. The tax benefits, well, maybe they’ll be offset by the greater liquidity of the main market and so on.
But the thing is ASOS is of a size that moving to the main market will mean entry into the FTSE250 index of companies. FTSE100 is the one hundred largest quoted companies, the 250 is the next quarter century. There is significant money invested in index-related funds. Unlike us traders looking to move in and out of stocks and shares such index investing probably is right for the slow and boring process of building a pension fund over decades.
There’s an importance to this though. Which is that funds tracking the index have to be invested in the constituents of the index. Sure, they all have their own proprietary weightings and so on, use other instruments at times, but inclusion in the index does almost always mean that a certain number of funds have to buy in. Further, no one has to sell because something enters the index – not when ASOS is entering the index from underneath for the first time that is.
There’s an imperfection in the market here. Those funds tend to buy in just as the new index entrant enters the relevant index. If they buy in earlier then they’re not tracking the index. So, they buy in right around entry point. Which means that there’s a good chance there will be significant buying of ASOS in February as it enters the FTSE250 index.
Sadly, this is not certain, it’s only a probability. But it’s a definite and known effect – index tracking funds have to and do buy into index entrants around the time of index entry. This often produces a boost to the share prices of index entrants like ASOS is going to be. The classic, or standard, way of capturing this would be to be long ASOS and short the FTSE250 index. Or it’s possible just to be naked long ASOS.
Of course, the problem here is that while this often happens to the share prices of index entrants it doesn’t always. There is no such thing as a risk free trade after all. All that can accurately be said is that entry into an index often does boost the share price of the index entrant. Maybe that will be true of ASOS.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.