Ahead of this Thursday’s BHP unification meetings, major US-owned fund manager Vanguard Australia has revealed how it will rebalance the BHP holdings in its Shares Index, High Yield and Large Companies ETFs, warning that for a brief period of time holders in the three funds will be exposed to currency and market risks they are not normally exposed to.
Vanguard says to prepare for the proposed unification, “[F]rom 17 January 2022 Vanguard Investments Australia will be able to acquire BHP Plc shares on the London Stock Exchange to support the investment strategies of the above-named Funds.”
“Under the BHP proposal, any shares in BHP Plc that VIA acquires will be exchanged for depository interests in BHP Limited, listed on the London Stock exchange.
“If approved, the unification is scheduled to be complete on 31 January 2022 at which time Vanguard Investment Australia will commence the process to transition the depository interests into ASX listed BHP Limited shares,” the fund manager said on Monday.
Vanguard Investments Australia said it will also be able to use US E-mini Index Futures in the period leading up to, and on the date of BHP’s unification, “to maintain fund liquidity, manage market exposure and cash flows, while supporting broader funding requirements.”
This means Vanguard will see the Australian funds briefly directly exposed to the US and UK markets.
“Acquisition of BHP Plc and US E-minis will result in direct exposure to the US and UK markets, which will introduce a small amount of currency risk. Currency risk is the chance that the value of a foreign investment, measured in Australian dollars, will decrease because of unfavourable changes in currency exchange rates.”
Vanguard says that these are “short-term changes (that) are consistent with the investment strategy and investment return objectives of the funds.”
“[G]iven the significance of the anticipated impact of the proposed unification on the Australian equities market, (the changes) are being made in the best interest of investors.”
Vanguard warned investors in the Vanguard Australian Shares High Yield ETF tracks the FTSE Australia High Dividend Yield Index that ” This index applies a 10% maximum weighting to any one company when the index is rebalanced semi-annually.”
“To maintain these diversification requirements, a 10% cap will be applied to BHP based on the closing price on 21 January 2022. On the effective date, Vanguard fund weightings in BHP may be over 10% due to market movements.”
Vanguard’s method of topping up its BHP holdings and the maximum weighting measure for a single stock will be familiar to holders of other funds.
These updates will be common for many funds – both listed and unlisted and especially those based on index hugging strategies that hug the ASX 200 or major sub-indexes (such as materials).
BHP’s huge weighting in the index is going to be a headache for these funds in coming months and years, especially in periods of underperformance by the Big Australian because of weak commodity prices.
But there are times when the BHP share price has outrun the wider market – such as in the recovery in commodity prices from mid 2020 to now. That could see these ETFs outperform and produce unrealistically high returns as BHP wags the wider market.
BHP shares eased 1.1% to $46.16 on Monday.
