UNIVERSITI PUTRA MALAYSIA

ACT 4211

Corporate Finance

Tri-semester 07 2010

An Analysis of Stock Market Indices in

Malaysia

Lecturer: Prof. Dr. Shamsher Mohamad

Group Members:

1.ABDULLAH BIN DAUD EX

02217

2.KHAIRUL NIZAM BIN MAHTAR EX

02245
3.LIM SHI SHYANG
EX 02249
Table of Contents

Table of Contents....................................................................................................... 3

What is a Stock Market Index?....................................................................................5

The Origin of Indexing................................................................................................5

Role of Indices............................................................................................................ 5

Characteristic of a Good Index...................................................................................6

Background of Malaysia Financial Market

In 1960, the Malayan Stock Exchange was formed and this carried out trading in
shares. The market indices of Malaysia are as follows:..............................................8

The Main and ACE Market...........................................................................................9

Adopting FTSE ...........................................................................................................9

Indices in Malaysia: FTSE Bursa Malaysia Index Series.............................................10

The FTSE Bursa Malaysia Index Series is designed to represent the performance of
companies, providing investors with a comprehensive and complementary set of
indices, which measure the performance of the major capital and industry segments
of the Malaysian and regional market. ....................................................................10

................................................................................................................................. 10

Tradable Indices.......................................................................................................11

Benchmark Indices................................................................................................12

FTSE Bursa Malaysia Hijrah Shariah Index ...............................................................13

FTSE Bursa Malaysia KLCI .......................................................................................17

Review Process......................................................................................................... 21

Issues.................................................................................................................... 22

New Economic Model (NEM) on Malaysia’s Capital Market.......................................22

How Does Stock Market Shows Rising Prices When Economic Fundamentals are
Weak?....................................................................................................................... 23

References................................................................................................................25
Appendix.................................................................................................................. 26

KLCI Calculation Methodology..................................................................................26

What is a Stock Market Index?

Firstly, a stock market is a place where stocks of listed companies are

traded. A stock market index is thus defined as a listing of a group of stocks
with a single figure to summarise the overall performance of the market. In
simple lay man term, it is the pulse rate of the economy. Generally, stocks
have something in common such as sharing the same exchange, or same
industry. Thus, indices can be classified in a wide variety of ways.

The Origin of Indexing

We often see updates of indices from daily news and easily in any newspaper
or radio broadcast. The ease of obtaining indices (plural for index) is mainly
due to its popularity as a concept in finance. Even in professional financial
field, indices are often viewed as a crucial element, which will be discussed
in this paper.

The history of indexing dated back as far as 1884 when Charles Dow created
the very first stock market index called Dow Jones Transportation Average
Origin. Shortly after, many indices were created such as the Dow Jones
Industrial Average (DJIA) which is widely publicized and followed today. It did
not take long for indexing to be applied for other instruments; fixed income,
commodities and real estate.

During the initial years, indexing was ignored because active managers
thought they are much better off by selecting winning stocks. Thus, it is
important for us to understand the function of indices

Role of Indices
Today, we live in a dynamic world where the stock market is at an
accelerated pace than before. We require a quick way to analyze and graph
the movement either on the basis of daily, weekly, monthly or yearly – and
hence, indices is used for this purpose.

Indices main purpose is to reflect movements in the underlying market

precisely. In the context of a stock market index, stock market is the
underlying market and it plays an important role in gauging the overall
economic health and progress of a country.

Furthermore, indices, as an average, are often viewed as a standard of

comparison to judge the performance of investors. The market rate of return
can also be measure from indices and accordingly, investors can evaluate
alternative investment by benchmarking to indices.

Indices also exhibits speculative element and allow prediction on market

movement. Variety of stock indices are available by dividing the market into
pieces; style, sector, industry, region or market capitalization; which allow
investors to better determine their exposures.

Characteristic of a Good Index

Schoenfeld S.A. (2004) listed seven key criteria which are applied to evaluate
the functionality of an index. The seven key criteria are:

1. Completeness

To truly reflect the underlying market, a good index should accurately

represent the return of the overall underlying market; or what is also
referred to as ‘investment opportunity set.’

2. Investability
An index should have no restrictions on who can purchase the securities
in the index. If the index includes selection of uninvestable securities,
this may result in tracking error.

3. Clear

It is required to have published rules and transparent index

methodology in order to attend to potential conflicts of interest between
index provider and the constituents.

4. Accurate and Complete Data

Since the primary reason for using indices is as benchmarks for

performance analysis, data should be therefore widely available.

5. Acceptance by Investors

Investors will tend to prefer recognized and widely used indices.

Moreover, academic and research commonly focus on established
benchmarks to provide insights.

6. Availability of Crossing Opportunities, Derivatives and

Other Tradable Products

More applicable for institutional investors, crossing allows for cost saving
on the basis of indices are more liquid.

7. Relative Low Turnover and Related Transaction Cost

Due to the fluidity of markets, an index must reflect changes in the

market in order to be regarded as a true benchmark. However, index
rebalancing results in turnover, leading to rebalancing cost. Lower
turnover causes lower rebalancing cost thus, easier to track.
Background of Malaysia Financial Market
In 1960, the Malayan Stock Exchange was formed and this
carried out trading in shares. The market indices of Malaysia are
as follows:

• Composite Index
• Industrial Index
• Finance Index. Properties Index
• Mining Index
• Syariah Index
• Plantations Index
• Technology Index
• Second Board Index
• MESDAQ Market Index
• Consumer Products Index
• Industrial Products Index
• Construction Index.
• Trading/Services Index

The Singapore Stockbrokers' Association of 1930 was the first formal

securities business organization in the country. It was rechristened as
Malayan Stockbroker's Association in 1937. 1973 saw the separation of
Malaysia and Singapore stock exchanges into KLSEB and SES. The Kuala
Lumpur Stock Exchange is also known as Bursa Malaysia Berhad. The stock
exchanges of Malaysia are Kuala Lumpur Stock Exchange, Kuala Lumpur
Commodity Exchange and Malaysia Monetary Exchange.

Malaysia financial market is governed and regulated by Bursa Malaysia

Berhad, or also known as Malaysia Stock Exchange (MYX). Previously known
as Kuala Lumpur Stock Exchange (KLSE), the name change to Bursa Malaysia
was following the demutualization process, which at that time consisted of a
Main Board, Second Board and MESDAQ Board with total market
capitalization of MYR 700 billion. It is only later in 2009 that the Main and
ACE market were introduced to substitute the Main Board, Second Board and
MESDAQ.

The Main and ACE Market

The Main Market was the product of merging Main Board and Second Board,
consisting of established companies. On the other hand, the MESDAQ
Market; short for ‘Malaysian Exchange of Securities Dealing and Automated
Quotation’; which is focused on Technology-based companies is revamped
into an alternative market called ACE Market; short for ‘Access, Certainty,
Efficiency’; consisting of companies of different sizes and sectors.

Mainly, the significant changes are in the regulatory approach, particularly in

listing and capital-raising.
The changes in board structure objective is to provide companies with a
clearly defined platform to raise capital, subsequently enhance efficiency,
access and certainty in fund raising process as well as maintaining protection
to investors. This board structure also makes Bursa Malaysia a more
attractive platform for Malaysia and foreign companies

Adopting FTSE
In 2006, Bursa Malaysia collaborated with FTSE Group in launching the FTSE
Bursa Malaysia Index Series which consists of tradable and benchmark
indices. FTSE Group is an independent company jointly owned by the
Financial Times and the London Stock Exchange - thus forming the F-T and S-
E based on the original acronym.

The ongoing efforts of Bursa Malaysia to maintain globalization necessitates

the collaboration with FTSE and below are some of the benefits from the
collaboration:
 a. Investable – To ensure no restrictions on purchasing the securities,
the indices are ensured accurate representation of the securities
available for investment through FTSE calculation methodology.
b. Tradable – Liquidity is important in trading to ensure stock availability
as well as ease of trading. Hence, by employing liquidity screening on
all stocks, the tradability of index series is enhanced.
c. Transparent – By incorporating an international index construction
standards, indices are more transparently managed.

Indices in Malaysia: FTSE Bursa Malaysia Index Series

The FTSE Bursa Malaysia Index Series is designed to represent the

performance of companies, providing investors with a
comprehensive and complementary set of indices, which
measure the performance of the major capital and industry
segments of the Malaysian and regional market.

The Family Tree of Indices in Malaysia. Source: www.klse.com.my

Red indicates tradable indices while blue indicates benchmark indices.

Tradable Indices

1. FTSE Bursa Malaysia KLCI (FBM KLCI)

Widely followed by investors as the benchmark for the Malaysian market,
the FBM KLCI is made up of the 30 largest companies in the FTSE Bursa
Malaysia EMAS Index; in other words, the Main Board’s largest 30
companies; by full market capitalization.

2. FTSE Bursa Malaysia Mid 70 Index (FBM Mid 70 Index)

Contains the following 70 companies in the FTSE Bursa Malaysia EMAS
Index by full market capitalization.

3. FTSE Bursa Malaysia Top 100 Index (FBM Top 100 Index)
Encompasses the constituents of the FBM KLCI and the FBM Mid 70 Index,
which totals to the top 100 companies of the Main Board.

4. FTSE Bursa Malaysia Hijrah Shariah Index

Consists of the largest 30 companies of the FTSE Bursa Malaysia EMAS
Index by full market capitalization. In order to meet the needs of
international Shariah-compliant investors, the constituents have to meet a
triple screening process –the FTSE’s global standard screening, the
Yasaar’s International Shariah screening and the Malaysian Securities
Commission’s Shariah Advisory Council (SAC) screening.

5. FTSE Bursa Malaysia Asian Palm Oil Plantation Index

Available in ringgit-based and dollar-based, this index allows investors to
track the performance of selected major listed plantation companies.
Countries selection is based on the classification of FTSE as ‘developed,
advanced emerging and secondary emerging countries’ which excludes
Japan, Australia and New Zealand.
Benchmark Indices

1. FTSE Bursa Malaysia EMAS Index (FBM EMAS Index)

Encompasses the constituents of the FBM Top 100 Index and FTSE Bursa
Malaysia Small Cap Index.

2. FTSE Bursa Malaysia Small Cap Index (FMB Small Cap Index)
Made up of eligible companies within the top 98% of the Bursa Malaysia
Main Market but excludes constituents of the FBM Top 100 Index.

3. FTSE Bursa Malaysia Fledgling Index

Consists of the remaining 2% Main Market companies that meet the
requirements and also excludes FBM EMAS Index. In simpler term, it is an
average of the share prices of very small companies in Bursa Malaysia.

4. FTSE Bursa Malaysia EMAS Shariah Index

Made up of Shariah-compliant constituents of the FBM EMAS Index
satisfying the screening requirements of the SAC. This index is mainly
developed for domestic Shariah-compliant investors.

5. FTSE Bursa Malaysia ACE Index (FBM ACE Index)

Made up of all eligible companies listed on the Bursa Malaysia ACE Market

6. FTSE Bursa Malaysia Palm Oil Plantation Index

Similar to the tradable counterpart, it is based on the FBM EMAS Index
and consists of companies which earn a commendable proportion of
revenue from palm oil activities.
FTSE Bursa Malaysia Hijrah Shariah Index

Over the previous years, the Islamic equity market underwent rapid growth
in untapped markets in Asia, Middle East and North Africa, much due to the
high demand of large populations in the Islamic funds industry. Additionally,
contributions of participants from financial institutions and high net worth
individuals had contributed to this growth.

There were some issues causing the delayed development of Islamic equities
in Malaysia despite the increasing demand. Challenges faced include high
costs to set up and finance a Shariah board, expensive screening processes
and relatively small size of many funds.

Under the Securities Commission Malaysia (SC), the Shariah Advisory

Committee (SAC) are involved in establishing general requirements that are
required to be fulfilled in order for a stock to be classified as Shariah
compliant. The SAC laid out these specific benchmarks to safe guard minimal
prohibited elements or related to the Shariah – thus determining the status
of a mixed company as a Shariah approved company. Before the initiatives
by SAC, Bank Islam Malaysia Berhad; the first Islamic Bank in Malaysia; had
taken the first step to review and identify companies listed on the KLSE as
permissible for Muslims to invest in. It was a significant event in Malaysia
Islamic equity market as it provided the much-needed break through for
Muslims to participate in the stock market.

The major characteristics of the Islamic equity markets are the absence of
interest-based transactions, doubtful transactions and unlawful stocks of
companies which deal in non-Shariah compliant activities – these activities
must be free from any form of unethical or immoral elements. Commonly,
investors holding corporate shares are entitled to capital gain or loss in the
form of dividends. However, there is no issue of dividend receipts being riba
as the distribution of dividends meets the principle of Musharakah.

The SAC also ponders upon various fatwa which have become exceptions to
the maxim, being translated into, “… if there is a mix of the permissible and
the prohibited, then it is ruled as prohibited”. For instance, mixing of
slaughtered animals by Muslims and non-Muslims is totally prohibited. This
fatwa is in line with the maxim as such a mixed item is prohibited in essence.
On the other hand, if an item, in essence, is not prohibited but is prohibited
for other reasons, it requires a different perspective. For example, money in
essence is not prohibited but money earned as a result of theft, robbery or
cheating or non-halal sources is strictly prohibited – and this applies to
securities. If dividends are distributed from profits which have been obtained
from non-Shariah compliant activities of the company, then the securities are
prohibited, according to the tolerable benchmarks set by the SAC.

SAC screens for Shariah compliant stocks at the central level biannually. The
screening methodology as developed by SAC involves both qualitative and
quantitative information. Quantitatively, the criteria for screening are
primarily based on the activities or sources of income for the companies. No
screening is done on debt or liquidity, indicating the screening processes
requires income statements rather than balance sheets. The qualitative
parameters involve the screening of the businesses that are prohibited or
disapproved by Shariah, where main activities of the companies should be in
line with Shariah principles. This screening process removes the need for
individual funds or investment companies to create their own Shariah
screening criteria.

Additionally, there are two criteria for companies which are:

1. The public image of the company must be good. Comparing to Middle

Eastern screening of listed companies, SAC took a different angle as
 financial gearing is not tested and instead, SAC focuses majorly on
activities of the companies. This implies that companies with more
liquid than illiquid assets are entitled to be classified under this
criterion.
2. The nature of business of the company is important and considered
‘maslahah’ (in the public interest) to the Muslim community as well as
the country. Also, this criteria attends to the issues of complicated
permissible and non-permissible activities factored into the revenue of
a company. If non-permissible activities are involved, then the non-
permissible element must be very minimal and involves matters such
as umum balwa (common plight and difficult to avoid), custom and the
rights of the non-Muslim community, commonly accepted by Islam.

Furthermore, four benchmarks based on juristic reasoning have been

established by SAC in order to have an objective minimum acceptable level
of mixed contributions from non-permitted activities. Hence, in order to
qualify, companies should not breach any of the four benchmarks:

1. The benchmark for acceptable revenues generated by clearly

prohibited activities for example, conventional bank (riba), gambling,
liquor and pork; is a maximum of 5%.
2. A benchmark of 10% is applied on profits from activities involving
prohibited elements that affect most people and deemed unavoidable,
such as interest income derived from fixed deposits placed in
conventional financial institutions or tobacco-related activities.
3. 20% benchmark is applied if companies have mixed sources of
revenues, such as rental income derived from premises that operate
non-Shariah compliant activities, including gambling, selling liquor and
pork.
 4. 25% benchmark is for companies with activities that are generally
permissible under Shariah and also maslahah (public interest), but
contains certain elements that could affect the Shariah status of these
activities for instance, hotel and resort operations or share trading,
which are deemed non-permissible according to the Shariah.

As of September 2009, 88% of the securities listed on the Bursa Malaysia’s

bourse are Shariah compliant and represent two-thirds of Malaysia’s market
capitalization. The FTSE Hijrah Shariah index and the FTSE Bursa Malaysia
EMAS Shariah index provide a broad benchmark for Shariah compliant
investment for investors. The FTSE Bursa Malaysia Hijrah Shariah Index is a
tradable index, consisting of the largest 30 companies in the FTSE Bursa
Malaysia EMAS Index by full market capitalization, all meeting the screening
requirements of international Islamic investors. Thus, it acts a vehicle to
allow capital providers to invest based on risk adversity, rate of return and
period of investment which suits their preference.
FTSE Bursa Malaysia KLCI

Kuala Lumpur Composite Index (KLCI) was launched on April 4, 1986 as an

open ended index with a total of 83 companies and calculated three times a
day with trading volume criteria of 250 lots per annum. Then, on January 30,
1990, the index calculation frequency was increased to 15 minutes. Trading
volume criteria was then increased to 1,000 lots per annum on May 29,
1992.

To accommodate the listing of stock index futures, the number of

constituents in KLCI was increased and capped at 100 stocks on April 18,
1995. Moreover, the computation frequency was increased to every 60
seconds. Mar 19, 1998 marks the enhancement to the objectives which were
focused on improved tracking of the economy.

As of July 6, 1999, the Kuala Lumpur Composite Index (KLCI) undergone a

transformation through adopting FTSE’s global index standards and will be
known as FTSE Bursa Malaysia KLCI (FBM KLCI). It continues to be the
bellwether index for the Malaysian stock market - as it had been since its
introduction in April 1986.

One of the prominent features of this transformation is that the FBM KLCI will
be leaner and more robust. Instead of the original 100 stocks, FMB KLCI will
consist of the 30 largest eligible companies filtered by market capitalization.
A market capitalization index is generated by determining the total market
capitalization of all stocks in the index and dividing by the total number of
shares of all the stocks.

The main objective is to enable the index easier to replicate. In other words,
an investor who is tracking the benchmark index will now only required to
purchase 30 stocks, rather than owning 100 different stocks. Purchasing 100
stocks carries a few disadvantages; one being a much larger basket and
additionally, more cost is required to maintain and risk of some of the
smaller stocks to be illiquid.

In this transformation, the largest 30 companies encompasses roughly 70%

of the total market capitalization for the local bourse – in line with the
percentage of market capitalization for benchmark indices in key global
markets such as the S&P 500. Hence, FBM KLCI has become a more investor-
friendly benchmark index with a manageable basket of stocks.

The adoption of standards by FTSE Group offers the FBM KLCI instant
recognition and risen its credibility among investors - both local and foreign.

As discussed earlier, the tie-up with FTSE has provided benefits in three main
area – tradable, investable and transparent. Stocks are liquidity screened to
ensure tradable, which requires each constituent stock to maintain a
minimum turnover of 10% of its free float shares in the 12 months prior to an
annual review in December.

To enhance investablility, FBM KLCI is computed based on free float adjusted

market capitalization. Companies must have at least 15% of free float to be
eligible for inclusion. Meaning, a stock with higher free float will have greater
weightage in the index. A case example will be if Public Bank has a free float
factor of 100%, it will be weighted based on its entire market capitalization.
On another note, if Sime Darby has a free float factor of 75%, it will only be
weighted based on 75% or three-quarters of its market capitalization.

Table below lists the 30 constituent stocks for the FBM KLCI together with
respective weightage in the index based on share prices as at June 11, 2010.
The weightage is dynamic as it will vary in line with share price movements.

With clearly defined rules, the transparency of FBM KLCI will also be
enhanced. Furthermore, the index will be calculated at a frequency of 15
seconds as compared to the 60 seconds of KLCI thus, being more in sync
with rapid changes in the dynamic market environment.

As a result of FBM KLCI transformation, it has lead to the creation of more

investment options such as Exchange Traded Funds (ETF), exchange traded
derivatives, structured warrants and other index-linked funds that will
improve overall market depth and liquidity. An ETF is also known as a
passive unit trust whereby its basket of stocks simply replicates the
constituent stocks of the underlying index. Generally, ETF has cheaper
management fees as compared to traditional unit trusts but maintain the
same benefits of diversification. Currently, we have the FBM30etf which
tracks the FBM30 index.

To remain a representative of the market, the FBM KLCI will preserve the
continuity of historical trend. Indirectly, market observers; typically, the
group of technical market analysts; who require a need of continuity, will
benefit from this. There will also be no amendment to the index value as FMB
KLCI will adopt the KLCI's last closing value when it is launched.

Table below compares the top ten companies in FBM KLCI and KLCI dated at
as April 30, 2009:

As observed, the largest company in both FTSE KLCI and KLCI is Sime Darby
(10.07% in FBM KLCI and 7.25% in KLCI). More importantly, we saw that
these top 10 companies represent 70% of FBM KLCI, as compared to only
50% of KLCI.
Table below compares the bottom ten companies in FBM KLCI and KLCI
dated at as April 30, 2009:

Also observed is the FBM KLCI is a better representative of its constituents

with the bottom 10 companies reflecting 9.5% of the index, while only
reflects 0.7% in KLCI.

Review Process

Semi-annual review occurs in June and Dec and in order to review the
constituents, data from the close of business on the last day of trading in
May and Nov is used. The revision is then implemented after close of
business on 3rd Friday in June and Dec. The diagram below illustrates the
process during the review:
In FBM KLCI which consists of the largest 30 eligible companies ranked by full
market cap, a company will be added to the periodic review if the its market
capitalization rises above 25th position while a company will be deleted
during the review if its ranking falls below 36th position. The deleted
company will then be moved to FBM Mid 70 index. A company which rises to
85th position will be added to FBM Mid 70 index and will be de

leted from FBM Mid 70 if falls to 116th or below. If a company ranks at or

above 97% full market capitalization of main board, it will be included into
FBM Small Cap index but if a company ranks below 99%, it will be moved to
FBM Fledgling Index.

Issues

New Economic Model (NEM) on Malaysia’s Capital Market

The Government has reacted to the complaints from foreign investors about
the lack in good equities due to sovereign holdings. Another issue was that
shares were tightly held by government agencies. Liquidity was suppressed
and the variety of stocks was lacking for fund managers due to this
occurrence which at times, multiple government agencies can be holding the
same stock. In directly, this causes a decline in private investments both
foreign and domestic – even local companies prefer to invest overseas.

As part of the NEM , Malaysian government dropped the 30% Bumiputera

equity requirement for initial public offerings and fund raisings on June 30,
2009. This was a significant change in the local capital markets, boosting
foreign investment and also in conjunction with efforts to further liberalize
the economy of Malaysia. Conjunctionally in this announcement, companies
with Malaysian-based operations listed or seeking to be listed in the Main
Market have to allocate 50% of the public spread requirement to Bumiputera
investors. Adding further, stock brokers and unit trust management
companies are allowed for 70% foreign ownership, as compared to the initial
level of 49%. Also, foreigners are allowed to own 100% of fund management
companies. Following on, a second wave of privatization involving 17
companies was announced.

M Salleh, 2010, wrote that it is not surprising that the first initiative of NEM
was to reenergize the private sector because it is the main foundation for
growth. The economy of Malaysia has to progress towards knowledge-based
industries thus, propelling investment in research and development which is
also part of NEM. Additionally, the fundamentals of listed companies are
emphasized as they are the main influence of investment from investors and
there is always a risk-reward relationship involved.

How Does Stock Market Shows Rising Prices When

Economic Fundamentals are Weak?

According to Sivalingam G. (2009), the current behavior of KLCI is contrary to

the expectations of finance and economic theory. When market index is up,
the Gross Domestic Product (GDP) is down and exports falls sharply. In
answering to this unexpected behavior lies firstly in whether the stock
market should reflect the economic fundamentals
The prices of 100 stocks in KLCI rise and fall according to demand and even
a company is deemed as risky, it can exhibit high and rising prices if
investors dump their money into the stock. Thus, this is where large
investors; primarily hedge funds and institutional investors; influence the
stock price and behavior of KLCI.

Understanding this relationship explains why some countries encourage

foreign hedge funds and investors, as they are able to move the market. In
early 1990s, this occurred to KLCI but after creating a spike in prices, these
large investors fled in 1996 when exports began to decline thus, the start of
1997/98 East Asian financial crisis.

The Efficient Market Hypothesis has three variations:

1. Weak-form efficiency, where all available historical information are

reflected;
2. Semi-strong-form efficiency, where all historical and current published
information are reflected; and

3. Strong-form efficiency, historical and current published information are

reflected and additionally, all investors have equal and real-time
access to insider information.

Researchers found that Bursa Malaysia was semi-strong-form efficient.

Hence, this lack of insider information not available to the public could have
lead to this behavior. Institutional investors are not publicized and created a
stock market structure which is uncompetitive and does not reflect economic
fundamentals.
References

Schoenfeld, S.A. (2004): Active Index Investing. Hooboken, New Jersey: Wiley

Finding Fortune in Islamic Equities, http://www.islamicfinanceasia.com,

Islamic Finance Asia (2009)

FTSE Bursa Malaysia KLCI Factsheet

(http://www.ftse.com/Indices/FTSE_Bursa_Malaysia_Index_Series/Downloads/
FTSE_Bursa_Malaysia_KLCI_Factsheet.pdf)

Majid, S. (2010) Are There Brighter Days Ahead for the Stock Market? New
Straits Times Press, Ltd. Apr 16,2010.

Sivalingam, G. (2009) Explaining the Stock Market Anomaly. Malaysian

Business, July 1, 2009.
Appendix

KLCI Calculation Methodology

1. Free Float

This differentiates FTSE Bursa Malaysia KLCI from KLCI. Companies are
included as a percentage of their free float, with a minimum free float of
15%. Free float restrictions are calculated using available published info.

2. Share in issue

Shares in issue is systematically checked and updated on the ex-date for

corporate events. Amendments are made only when the total shares in issue
held within the calculation system changes by more than 10% on a
cumulative basis.

Adjustments to reflect major change in the amount or structure are made

before the start of the index calculation on the day of which the change
takes effect.

Changes of shares in issue is not due to corporate actions, totaling less than
10% of the number of shares in issue but more than 1% will be made
quarterly after the close of business on the 3rd Friday of Mar, June, Sept and
Dec.
 3. Liquidity

10% of companies’ free float adjusted shares in issue must be traded in past
12 months prior to the review month.

4. Index Calculation

FTSE KLCI has now increased the frequency of index calculation from every
60seconds to every 15 seconds, enabling closer tracking of the market with
better efficiency.

5. ICB classification

Classification of constituents is determined by Industrial Classification

Benchmark (ICB), jointly developed by FTSE Group and Dow Jones Indexes.
This classification allows comparison across region and sectors.

There are four levels of classification but the system categorized companies
into subsectors, based on the nature of business. In other words, the nature
of business is the primary source of revenue.