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The dramatic rise of index investing in the US might be one factor driving the increase in non-US public companies looking to switch their stock market listings stateside, according to some market observers.
CRH, the world’s largest building materials company, moved its primary listing from London to New York in September, while packaging company group Smurfit Kappa, another Dublin-based business, is set to follow suit.
UK-based commodity broker and clearer Marex has also filed to list in the US, snubbing London after pulling a plan two years ago to list on its home stock market.
UK pollster YouGov is among those considering the same option, and British chip designer Arm listed in the US this year, despite an intense lobbying campaign for a London offering. In November, Glencore said it would list its planned coal mining spin-off in New York, despite natural resources traditionally being one of London’s strengths.
Several factors have been cited for the trend, ranging from a desire for higher executive remuneration schemes, which are perceived as more acceptable in the US, to higher valuations, a factor cited by both Smurfit and Glencore.
“Investors in the US are very eager to buy this cash-yielding company and we believe we would get a better valuation for this business in New York than we would in London,” said Glencore’s chief executive Gary Nagle.
However, another factor may simply be the weight of forced buying by index-tracking passive funds if companies are able to make their way into the major US stock indices.
The assets of US-domiciled passive funds quadrupled from $2.6tn at the end of 2012 to $10.9tn a decade later, according to data from the Investment Company Institute. The vast majority of this money is invested in the US.
In contrast, UK investors held just £301bn in tracker funds as of September, according to the Investment Association, much of which would be invested overseas.
Across Europe as a whole including the UK, there were €2.4tn worth of exchange traded funds and index-tracking mutual funds at the end of 2022, according to the European Fund and Asset Management Association.
Research by Jefferies suggests CRH could see net purchases of 135mn shares from passive funds as a result of its switch to New York. This is equivalent to virtually a fifth of its 693mn issued shares.
“The US [investment industry] is so much larger than Europe and within that Europeans tend to invest internationally and the US market is domestic so the difference domestically may be 6-7 times larger,” said Peter Sleep, senior portfolio manager at 7 Investment Management.
Jefferies said CRH was likely to be eligible to join the S&P Total Market index in June, “which could drive the purchase of 35mn shares”.
It could enter the Russell 1000 index in the same month, assuming FTSE Russell views the US to be the company’s most liquid exchange — it has retained an ordinary, but not primary, listing in London, but is no longer traded on Euronext Dublin. This could prompt passive purchases of a further 28mn shares, Jefferies believed.
The big prize, though, would be entry into the S&P 500 index, which could drive 101mn of share purchases. Jefferies believed this could happen in 2025 at the earliest, but added that this decision “is at the discretion of the S&P Index Committee and can be very difficult to anticipate”.
Set against this, Jefferies foresees potential selling of 29.4mn shares in November 2024 if MSCI reclassifies CRH from an EU to a US company.
Sleep said CRH had “already suffered the pain of negative cash flows in Europe [where the stock was in the FTSE 100 and Stoxx Europe 600 indices] but they will get the positive cash flows” in the future.
“I suspect the money following the S&P 500, if that is what they go into, is much larger,” he added. “The S&P 500 is just a bigger pot. The FTSE is a dot compared to the S&P market cap.”
“It’s somewhat of a new revelation. I don’t think this is in the investment literature, about how a company can increase its value by changing its primary listing,” said Bryan Armour, director of passive strategies research, North America at Morningstar.
CRH declined to comment but it has not indicated that the prospect of greater passive flows in the US was a factor in its decision.
In its public statements, it said it believed “a US primary listing will bring increased commercial, operational and acquisition opportunities for our business” and “the US is expected to be a key driver of future growth due to continued economic expansion, a growing population and significant construction needs”.
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Armour was unconvinced a desire to attract more passive dollars was likely to be a major driver of the decisions of CRH and others, arguing that the index inclusion effect, triggered when a stock enters a new benchmark, “has dropped significantly [in the US] from 10-20 years ago”.
He believed relative valuations may be a bigger factor, with the Russell 1000 index of large US companies currently trading at a price-book ratio of 3.5, more than twice the 1.6 of the MSCI EAFE index, which tracks developed world stocks outside North America.
Armour said only businesses with significant fixed assets and revenues in the US would be likely to enter the major US indices and sounded a note of caution for any others thinking of following the crowd to New York.
“The US is at an all-time high in terms of its market share of the global market. Will that continue forever? History tells us no,” he said. “It might not be smart to change the business structure to try and get more forced buying from passive funds.”
