Peregrine Diamonds Ltd. PGDIF

Smallcap index

[Durkastan]

The volume on Friday probably has little to do with the announcement of the inclusion of PGD to the TSX completion (smallcap) index.

Index rebalances are done on a set day of every quarter. This quarter, that day is Sept. 17.

If you have an index portfolio, such at the TSX Completion, then you are trying to track the benchmark as closely as possible. The more deviation from the index you have in your portfolio, the more tracking error. Index managers ideally want to have ZERO tracking error, although a little bit is inevitable.

If you are making an ACTIVE decision to include out-of-index stocks in your portfolio, then it's no longer called tracking error, but rather it's an attempt at adding "alpha", or positive return above your benchmark. It's similarly possible to achieve "negative alpha" because your picks caused you to underperform the benchmark.

For this reason, fund managers generally do not buy stocks in advance of their actual inclusion in the index. For example, PGD is getting including in the index on Sept. 17. If a fund manager were to add PGD to their TSX completion index portfolio in advance of Sept. 17, he/she would either be making an "active" investment decision to add alpha, or would knowingly be taking on some tracking error. Neither of those is desirable for an index manager.

There are funds out there whose mandate it is to track the index, but are able to overweight/underweight certain stocks up to 1-2% in order to add alpha. Some of them might see PGD as a chance to add some performance, and they would conceivably buy some PGD in advance of the actual rebalancing date.

On September 17th, we should see some pretty large buying flows on the day that the stock gets added to the index. Index funds are typically very large, and pretty much every major fund in Canada has some form of a TSX Completion Index Fund. Definitely great news for us shareholders, no matter how you slice it.