Tower and the trouble with passive index funds

Smart chief executive Anna Scott.

One of the consequences of insurance company Tower's stellar share price run is that the stock will rejoin the benchmark S&P/NZX 50 Index before trading starts on Tuesday, Oct 22 when a successful takeover will remove retirement village operator Arvida.

Tower dropped out of the benchmark index in December 2016.

Tower's shares have risen from as low as 58 cents last December to as high as $1.45 on Thursday as the company has issued massive profit guidance upgrades from as little as $22 million for the year ended September to about $83 million on Friday.

So, shareholders had already enjoyed a pretty heady ride with the shares closing at $1.36 on Thursday last week ahead of the latest guidance upgrade.

Now, the shares are likely to rise further, purely because of Tower's admission to the index – it will also join the midcap index – because all the relevant passive index funds will have to buy the stock in order to properly reflect the indicies.