Not having an opinion on SpaceX is going to cost you

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

We all know that passive funds will be forced by their algorithms to follow decisions taken by the index committees and methodologies of various benchmark providers. But what about human fund managers?

Views differ as to whether Elon Musk’s lossmaking value telecom firm is really worth as much as $1.75tn. Or indeed whether 92x last year’s revenues makes it cheap at the price.

Fund managers who just don’t have the mental and emotional energy to track all of Elon’s tweets could just bypass this Friday’s mega-IPO and stick to their knitting — be that quality growth, deep value, or whatever. And this is the course that many successful so-called hedge funds that don’t actually hedge will take.

But any portfolio manager reporting performance relative to a market index has no such luxury. They are, in effect, relative value managers — going long a bunch of stocks they like and short any whose portfolio-weight is less than the index weight. And if those underweight positions do well they’ll need to explain to their clients how they screwed up.

And so, just not buying SpaceX is, for this cohort, functionally identical to going short SpaceX. What if SpaceX memes? That would be annoying, and also costly.

Alphaville therefore thought it would be fun to work out how much stock managers would in aggregate have to buy if they just don’t want to play the “how much is SpaceX actually worth” game, and simply neutralise their index position.

As is often the case, this turned out to be a much harder question to answer than we’d reckoned. 😣

But after a lot of fiddly data work, Alphaville reckons that active fund managers (who want to ignore Musk) and passive fund managers (who have no choice) will in practice have to buy over $14bn of SpaceX stock between the IPO and July 3.

And that’s almost all because of the latest raft of index tweaks that benchmark providers have made in recent weeks to debase themselves before the Technoking and his investment bank enablers make sure their indices accurately reflect the stock market.

However, we hope you’re here as much for the data, the methodology and just general financial sleuthing as you are for the conclusions, so here’s how we got that number.

Morningstar researchers combed through the investment prospectuses of 6,006 US-registered mutual funds and 5,100 ETFs, identifying 3,203 separate benchmarks against which $41.1tn of assets are managed and sent the data over to us. 😊 This skips much of asset managers’ business, but it’s a lot.

OK, three thousand prospectus-disclosed benchmarks is obviously far too many for us to handle. So we narrowed our focus to just the top 300 indices. Luckily, this captures 92 per cent of assets, so we’ll hopefully get a decent ballpark answer.

Here’s an assets-under-management breakdown for these top 300 indices. We’ve classified them ourselves, so please don’t shout at us if we’ve made mistakes — though we hope to correct any errors we’re made aware of pretty swiftly.

Of the almost $38tn total AUM attributed to the top 300 benchmarks, $27.6tn relates to stock benchmarks. We’ve split FTSE Russell into FTSE GEIS and Russell, and S&P DJI into S&P DJI and S&P DJI Total Market, Indices for reasons that will become apparent later. You can click on the tree-map to see how assets break down to individual indices.

Not all equity indices contain US large cap stocks. Seven of the top 20 indices — ranked by AUM using end-April data — exclude them altogether:

Extending the count to the top 75 stock indices, $19.4tn contain US large caps and $6.9tn don’t.

Although $1.2tn of AUM attributable to funds managed against benchmarks containing large cap US stocks are sector-specific or high dividend indices in which SpaceX is unlikely to feature.

Each index is a slightly different size, meaning that we needed to estimate different post-float index weights for each one individually. And each index provider has slightly different index inclusion rules — some of which have shifted around in recent weeks.

For example, CRSP and Nasdaq each amended rules for fast-track entry of megacap US IPOs into their indices — either speeding entry or amending free-float requirements. FTSE Russell flipped their fast-track rules to move more in line with their FTSE GEIS range. And though barring the door of the S&P 500 for now, S&P Dow Jones did make changes that will see the timeline for inclusion into their Total Market Index suite shortened.

And each index has its own timeline for fast-track inclusion, with CRSP, Russell, S&P DJI indices including mega-IPOs after five trading days, MSCI including them after 10 days, and Nasdaq waiting 15 days before adding them (triple-weighted if coming with less than a third free-float).

You can see maybe why this became a rabbit hole.

So what does this mean for flows of benchmarked assets?

We think that managers who have absolutely no interest in going either long or short Elon will need to collectively buy $8.5bn of SpaceX stock on the 19th June, a further $1bn on 26th June and a final $4.7bn on July 3.

And so we’re talking a cumulative, de facto mandated $14.2bn of mutual fund and ETF orders by July 4 to avoid having to take a view on Elon. That number would’ve been around $11bn higher if the S&P 500 index committee had leaned a different way. But it’s $13.2bn bigger than the $1bn it would’ve been if index committees had sat tight on their existing fast-track methodologies.

And this is before we count institutional assets like pension funds, insurers and foundations, as well as every single foreign owner whose benchmarking habits we currently lack information.

We’re not sure if Musk will ever put humans on Mars. But the rash of index methodology changes mean he’ll be exerting a gravitational pull on portfolio purses pretty much immediately.

Further reading:
— SpaceX won’t make the S&P 500 (FTAV)
— Et tu too, FTSE Russell? (FTAV)
— New Nasdaq rules offer SpaceX free liquidity (FTAV)