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Berkshire Hathaway Inc. Message Board

  • wright1bby wright1bby Mar 29, 2003 6:28 AM Flag

    index funds selling pressure?

    With the change announced by wilshire index funds tracking the 4500 and 5000 will have to sell about 25% of their BRKA holdings between Feb and July. The change in the index is phased in 5% per month starting at the end of Feb. What affect will such short term forced selling have on BRKA. I began to wonder about this when I noticed that BRKA made up 5% (5 times as much as the next biggest weighted stock) of the wilshire 4500 index which is a huge percent of an index of over 6000 companies.
    I looked at the amount of money in vanguards total market and extend market index funds and this change requires them to sell about 1000 shares of BRKA. How much more money is indexed to these funds through other mutual fund companies? The federal thrift savings plan also is a significant player in this as the 4500 is one of only 6 choices for about 75 billion dollars of federal employees retirement money.

    I am guessing that about 3-4K shares of BRKA will be sold for no reason other than to continue to track an index. Short term what kind of effect is that likely to have on a thinly traded stock? Traders?

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    • wright1bby:

      Yes. You caught me!

      I'm not sure about Vanguard Extended Market. But you're right with regard to Vanguard Total Stock Market. If I remember correctly, they buy all of (replicate) the first 1,000 companies by market cap (which would include Berkshire) and sample the remaining "4,000" . Total Stock Market actually contains 3,725 stocks. I believe the "Wilshire 5,000" actually has 7,000 or 8,000 stocks. Thanks for setting things right, wright :-)

    • Web rules:

      The risk of not tracking the index would be at worst that he was underweighted in BRK by 20 basis points, the day or so before the index 'officially' changed. With the hypothetical I laid out - selling 1 or 2 round lots per day, he'd be an average of 10 basis points underweighted during the month.

      Over 5 months Sauter has to drop BRK's weighting from 5% of assets down to 4%. During the transition he'll be an average 4.5% in BRK and an average of 0.1% underweighted. That assumes he targets to be perfectly matched to the index at each month end.

      A better alternative would be to slow the daily sales targetting to hit the index the middle of the month FOLLOWING the change. That would mean he'd be overweighted 10 basis points the day of the index change, on target at mid-month, and underweighted 10 basis points the day before the next change. His average weighting DURING the transition would then be on target, +/- those 10 basis points.

      As was noted earlier, Vanguard's Extended and Total market index funds don't claim to literally match the index: They use statistical sampling techniques to match the results as closely as practicable. That applies mostly to the smaller cap components which are the least practical to actually acquire in literal conformity with the index definition. Just as a pracitcal matter, with BRK being by far the single largest component however, whether at 5% or 4% of the total. . . it HAS to be represented and the weighting decrease must be represented as well.

      But the risk of underperforming the index is limitted to the chance that BRK will perform significantly better than the rest of the index during periods that they are underweighted, or significantly worse, during periods they are overweighted.

      Say in the first 1/2 of June, BRKA drops 10% while Ext Mkt is overweighted an average of 5 basis points. The rest of the 4500 index is flat for the period. Berkshire's 10% drop while overweighted an average of 5 basis points, would cause the fund to underperform the index by 1/2 basis point [.1 x .0005 = .00005 = .005%, i.e.,

      1/2 of 1/100 of 1%.

      ======

      All of which begs the question:

      If the wilshire 5000 selling isn't significant, why does 'the trade' still work?

      My guess is the answer has to do with Keynes analogy of the market to a newspaper beauty contest in which the trick was not to pick who YOU think is the prettiest girl, but to pick who you thought everyone else would think was, or better yet who YOU thought everyone else would think everyone else would think . . .

    • Thanks for the class info Jad.
      The reason you need to consider the total market is because 1% is small but 1% of 25 billion is actually greater than 5% of 3-4 billion.
      Also doesn't extend market fund uses the sampling for the smaller issues not for the largest 1300 or so stocks in the index?

    • Well here is where I'm having trouble making the leap:

      "BRKA made up 5% ... of the wilshire 4500 index"

      "I looked at the amount of money in vanguards total market and extend market index funds and this change requires them to sell about 1000 shares of BRKA"

      I don't follow this closely, but what does the amount of money in Vanguard's total market funds have to do with the Wilshire 4500 index? WFIFX and WINDX are two Wilshire index funds and they have $85M and $16M of assets respectively. 5% of that would obviously not be a lot.

      BRKA has by far the largest per-share price of any stock on the market, to include it in an index of 4500 stocks, it would make sense to have the smallest number of shares of BRKA, in fact the fund might be normalized by BRKA share price.

      As you can tell I'm skeptical about any huge downward pressure from this change, I think it is inconsequential. I'm happy to be disproven though.

      • 4 Replies to randy_foo
      • "I don't follow this closely, but what does the amount of money in Vanguard's total market funds have to do with the Wilshire 4500 index? WFIFX and WINDX are two Wilshire index funds and they have $85M and $16M of assets respectively. 5% of that would obviously not be a lot."

        VEXMX has $2 billion with 5% in Brk and VTSMX has $15 billion in assest with about 1% in Brk.

        Following is a link to institutional holders: http://biz.yahoo.com/hd/b/brka.html

      • Vanguard explanation-
        The wilshire 4500 and the 5000 are market cap weighted so I used market capitalization and lots of rounding and no calculator to come up with the 1% and 1000 shares figure. The 5% figure came from VIEIX top holdings. Vanguards extended market funds (VIEIX,VEXAX,VEXMX) track the 4500 (which is the 5000 minus the S&P 500). Vanguards total market funds (VTSMX,VTSAX,VITPX,VITSX) track the 5000.
        Berkshire was about 5% of the 4500 and 1% of the 5000.(It has by far the largest market cap of any company not in the S&P which is why it is such a big share of the 4500)
        Wilshire is reducing that by 25% over 5 months. The reason: On a strict market cap basis it was overweighting BRKA stock holdings(coke amex etc.) by counting them towards both their own market caps and BRKA's market cap. So now they are subtracting out BRKA's stock holdings from BRKA's market cap to determine BRKA's market cap weighting in the indexes.
        Vanguard has about 4 billion invested in it's extended market funds. It has about 25 billion invested in its total market funds.
        $4b*5%=$200 million
        $25b*1%=$250 million
        If vanguard is to match the index they have to sell 25% of that $450 million worth of BRKA stock over 5 months.
        112 million/71 thousand=1577 shares
        This varies from the original figure of 1000 as I used a calculator and less rounding this time :-).
        Vanguard is the biggest player I am sure. However there are many others.
        -other mutual fund companies have similiar indexes
        -Barclays I know has 1.3 billion tracking the 4500 in gov't employees thrift savings plans.
        -There is an exchange traded fund that tracks this index.
        -Lots of institutional money is academically invested through asset allocation and the 4500 is a big player in this world. Retirement funds, state trust funds, etc. are involved in this scenario.
        Obviously not all of these are selling exactly at the end of the month. I am sure the various money managers have different rules and trade accordingly. The last few months though do seem to indicate significant selling pressure around the end of the month.
        P.S. You are 100% correct in stating that Wilshire Funds dumping of about 4A shares at the end of each month probably isn't a big deal:-) Vanguard and others however might have an impact.
        P.P.S. Being as I am a poor boy am not a trader and don't margin. I thought that the 1st of July might be a good time to try to have enough cash gathered up to buy me a B share or 2.

      • randy,

        Several people did a lot of crunching last month to come up with a guesstimate on the number of A shares that would need to be sold. I can't recapitulate it. But it appeared to be plenty to cause the kind of action we've seem. Sorry I'm not psyched enough to dig 'em all up. And I wouldn't claim they were proof. Something like 1,000 A's was the ballpark, but, man, that's strictly from an untrustworthy memory.

      • Details on the Vanguard Total Market Fund.

        The fund employs a "passive management"�or indexing�investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The fund typically invests all or substantially all of its assets in the 1,300 largest capitalization stocks in its target index (covering nearly 95% of the index's total market capitalization), and in a representative sample of the remainder. The fund holds a range of securities that, in the aggregate, approximate the full index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.

        Therefore, the Total Market Fund must mimic the Wilshire to stay in balance.

    • greetings wright1bby...........wanted to
      get back to you on the following from my
      RenoRollersPort............
      so far so good.......but.....?
      http://stockcharts.com/def/servlet/SC.web?c=gt,uu[w,a]daclyyay[df][pb50!b200!f][
      vc60][iut!Ub14!Lp5,3]&pref=G


      later, and best to you,
      (think hunting).......bdparts

    • <<I am guessing that about 3-4K shares of BRKA will be sold for no reason other than to continue to track an index.>>

      Assuming (1) the index funds can interchange 30 B's with each A; (2) they can sell their shares DURING the month - not just on the last day when the index changes; and (3) yahoo volume data can be trusted . . .

      The funds have about 100 trading days to dispose of -say- 3500 a-equivalent shares. Combined average daily volume works out to more than 700 a-equiv shares. 35/700+ is less than 5% of daily volume.

    • "I began to wonder about this when I noticed that BRKA made up 5% (5 times as much as the next biggest weighted stock)"

      5% sounds like a lot and 5x larger than the next biggest weight also sounds like a lot. Vanguard's Wilshire 5000 fund:

      http://partners.thomsonfn.com/kiplinger/funds/cgi-bin/info_disp?ChartSelection=R
      eport&rpt_type=1&chart_type=4&alert_type=&hn=fund_fheader.inc&fn=footer.inc&site
      =kp&request=f32767&group=wo&rp=KP&ticker=VTSMX

    • If you're hungry for burgers and they are dropping in price, that's probably a good thing.

      Have limit orders to buy back my trader B's @ 2100 and 2000. Hope the trigger gets tripped.

      Suspect there may be some hungrier "junk food junkies" in line ahead of me.

 
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