Understanding HSI - II - Fundament of HSI

Posted by Chris IO on August 15, 2017

Before going into another session of analysis on HSI, it is good, if not necessary, to know how the index is computed from its constituents mathematically. Here is a list of must-know fact that tells you how HSI is reported.

Fundamental:

- HSI is an equity index that consists of 50 blue chip stocks listed in HKEx.
- Based on the July report 2017, the index represents 57% of total market value and 49% of turnover in HKEx
- However the 7 biggest stocks already account for half of the weighting, namely. Tencent(10.96%), HSBC Holding(10.91%), AIA(8.58%), CCB(8.13%), China Mobile(5.95%) and ICBC(4.67%). Noted that Financials stocks account for 48.75% of the weighting.

On total return:

- HSI is a basket of 50 blue-chip stocks. Just like any equity, it would distribute dividend every half year. Thus the index would be discounted whenever dividends are distributed. To compute the absolute return of HSI, you need to look into the HSI total return index which takes into account of the historical dividends.

For computational methodology, I would explain it below. But you may go straight to the reference if you like documentation.

According to HSI Company, the index is free float-adjusted MV weight index with a 10% cap on individual securities.What does that even mean? The statement can be broken in three elements:

  1. free float-adjusted
  2. MV weight
  3. 10% cap.

I would explain them one by one. But let’s look at the real formula:

Formular to compute HSI

In the most generic terms, the index takes into account 4 factors:

  1. Price
  2. Issued shares
  3. FAF
  4. CF

It measures their ratios relative to values yesterday, and multiply by the closing index yesterday. Since both FAF and CF adjust quarterly(Super important!), the index primarily behaves no different from a market-cap based index, except it is interrupted by quarter adjustment.

Market Value(MV): Price multiply by number of issued shares

Free float-adjusted factor: Adjusted quarterly based on the liquidity of the issued shares. Reflect whether the proportion of shares are held by big corporations or shareholders only or other investors.

10% cap: The maximum influence of individual stock on the index is capped at 10%. As of now (As of 14/8/2017), there only two stocks which reach this limit. HSBC and Tencent, only 53% and 59% of their capitalisations are accounted into HSI respectively.

However, as you may notice, one stock may also exceed 10% cap if it surges after the quarter rebalancing of FAF and CF. In addition, if a constituent is excluded from the index, the index would recount so influence of individual stocks may exceed the 10% cap as well.