The phones at Alerian definitely ring a lot more during quarterly rebalancing months (March, June, September, and December). For those that don’t have the rebalancing schedule memorized by heart: On the first Friday of the quarterly rebalancing month, final numbers for share count, float, and trading volume are run after market close. On the second Friday, constituent additions and deletions are announced prior to market open. And on the third Friday, all Alerian indices are rebalanced after close. Final constituents and weightings are updated (and available for download) on each index’s page prior to the following Monday’s open.
Between the first and second Friday, people call to see if they can glean any information about who will be added to or removed from an Alerian index. Between the second and third Friday, people call asking about how many shares will need to be traded in and out of a particular name. Why all this commotion?
Since March 2011, when a name has been added to either the Alerian MLP Index (AMZ) or the Alerian MLP Infrastructure Index (AMZI), that MLP has outperformed the respective index it was added to on the day of the announcement. The chart below shows the day-of outperformance for the AMZ (in blue) and AMZI (in orange).
(click to enlarge)
Average outperformance of a company added to either index has been 316 basis points (bps), ranging from 4 bps to as high as 612 bps. We like to call this phenomenon “The Alerian Effect”, shamelessly coined after the “S&P Effect”, describing how a company’s share price jumps when they are selected to the S&P 500 Index (SPX), since all the products tracking the index will need to buy the company’s shares.
As of August 29, over $21 billion in assets (via ETNs, ETFs, SMAs, mutual funds, structured notes, total return swaps, and variable insurance products) are linked to the AMZ ($7.7 billion) and AMZI ($13.3 billion).
If an MLP is added to the AMZ with a 1% weighting, then $77 million worth of units (shares) would need to be bought by tracking products. Read By the Numbers: Trading Days to Exit for how many trading days it would take to buy $77 million worth of an MLP.
As you look at the chart, you’re probably noticing the upward trending orange line for the AMZI and downward plateauing blue line for the AMZ. The R-squared value for the AMZI orange line and AMZ blue line are 0.36 and 0.14, respectively, so neither line is definitely conclusive of a trend. But, we wanted to include the line to show that the “AMZI Effect” (362 bps outpeformance) has become more pronounced than the “AMZ Effect” (288 bps outperformance), as the amount of linked product AUM tracking the AMZI has exceeded that of the AMZ since late 2012. The AMZI also only has 25 constituents to the AMZ's 50, so constituent weightings tend to be higher in the AMZI, meaning more units need to be bought.
Due to the Alerian Effect, AMZI Effect, and AMZ Effect (or whatever you want to call it), we cannot stress enough the importance of an index provider being independent and without conflicts of interest. Similar to how public companies have quiet periods before earnings, Alerian engages in a two-week quiet period from the first to third Friday of every quarterly rebalancing month, where we refrain from discussing rebalancing and/or clarifying methodology. Now that the September rebalancing is complete, we’re happy to answer any questions you may have.
In the next part of this series, we will discuss the day-of announcement impact to MLPs being removed from the index, as well as equity performance between the announcement and rebalancing dates for entering and exiting names. Stay tuned.