Brookfield wants to move for a US index fund love

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Canadian alternatives giant Brookfield Asset Management hosted an investor day this week to explain its “tremendous opportunities.” One of them seems to be the administrative move of the headquarters to New York.

Companies move all the time, but mostly for tax or business purposes. But it’s rare for adults to do that. And what makes this so intriguing is that the move only seems to be included in various US stock indexes.

Here’s the relevant excerpt from the investor day transcript (which was Tuesday in New York), courtesy of AlphaSense. The speaker is Brookfield CFO Hadley Peer Marshall. FT Alphaville’s take below:

. . . We want to continue to broaden the base (of our shareholders) in the deepest capital funds. And more specifically, when we think about the feedback we’ve received, it’s about further increasing the liquidity of BAM shares. And then as we’ve moved more to a balanced US and the rest of the world from a shareholder perspective, some of the feedback has been around inclusion in other stock indices globally from the US side.

So some of the steps we’re thinking of taking are the first is moving our headquarters to New York. Now, that only makes sense because we have the largest percentage of our employees, our revenue and our asset management – asset management located in the US.

A reminder for those who don’t believe in Brookfield’s byzantine structure, in 2022 Brookfield Asset Management renamed itself Brookfield Corporation and listed 25% of its asset management business (since increased to 27%), which it then took over the original name BAM.

Brookfield Corp is in turn controlled by a group of senior partners led by CEO Bruce Flatt. Our MainFT colleague Mark Vandevelde has written a masterful dissection of the Brookfield empire here .

Marshall said management was also considering Brookfield Corp swapping its 73% stake in BAM (via an unlisted holding company) for shares in the listed entity. Here are the relevant slides from the presentation board:

This would take its market cap from its current $25 billion to $92 billion in total (about $68 billion at the time of the pixel).

But of course, let this be an optical thing and not improve the liquidity of BAM’s Canadian and US-listed shares as long as Brookfield Corp keeps its 73% stake (which it says it will).

So clearly this move of the US headquarters is the most significant, but even despite the talk of “broadening” its shareholder base, it is assumed that inclusion in various US stock markets would be much more valuable than being one of Canada’s top 10 members. S&P/TSX Composite Index.

We saw a recent example of how powerful index inclusion can be with Super Micro Computers. Blackstone, perhaps the closest comparable US company, entered the S&P 500 almost exactly a year ago, and since then its market capitalization has grown by about $40 billion to $175 billion.

Yes, this is a simple way to indicate impact. Brookfield shares have actually returned 28.4% over the past year, just shy of Blackstone’s total return of 29.9% over the period. There has also been some recent research indicating that the “index inclusion effect” has evaporated.

But it probably still matters – a lot. As I previously wrote, Morningstar estimates that the S&P 500 is now tracked by more than $4 billion in passive index funds and serves as a benchmark for another $2.9 billion in active mutual funds. Then there’s all the non-fund money that in reality even less publicly tracks indexes like the S&P’s flagship U.S. stock index.

TD Securities’ index guru Peter Haynes notes that inclusion in the S&P 500 is unlikely even if Brookfield Asset Management moves its headquarters to New York (the index allows some discretion and is apparently considering rules that would prevent a perfunctory move of headquarters to purpose of index inclusion BAM is not expected to end up in the MSCI or FTSE country indices either.

But Haynes believes Brookfield would enter the US Russell and CRSP indices, and as the Morningstar chart below shows, they are still very large and influential.

By comparison, the TSX barely makes the top 1,000 indexes, ranked by benchmark and indexed assets.

Haynes calculates that BAM’s inclusion in the corresponding Russell and CRSP benchmarks would lead to buying index funds a about 8.5% of Brookfield’s total float, or about 38 million shares.

It won’t happen in one fell swoop — it would likely be the inclusionary stages, and the likes of Vanguard, which uses CRSP, is particularly careful to be tactical and flexible in its purchases — but it would undoubtedly have a big impact.

As Haynes wrote in his memo, this is not just a Canadian problem. It has been part of the motivation behind some of the recent London Stock Exchange exits, as international companies are willing to give up even a large position in domestic stock indices “to chase the pot of gold at the end of the S&P rainbow”.

Brookfield management is correct in stating that the decision to move its headquarters to the US has only advantages and no disadvantages. This is true from the perspective of the Company, but not from the perspective of the global markets and, in this case, Canada. We hate that a simple stroke of the HQ pen can result in 8.5% of a company’s shares being absorbed by indexers in another country and leaving an issuer split between two jurisdictions. This makes no sense.

In the long term, we expect a fairly material increase in US market share for Brookfield at the expense of the Canadian market. While this decision itself isn’t a death blow, it’s still a cut, one that will add to many others, and leaves us worried about the final look of Canada’s stock market when that number eventually hits 1,000.

Canada is not alone in this problem, although other markets are fighting back. It’s time we do the same.

We’re not sure what the smaller markets can do to fight the gravitational pull of America’s financial system, but FTAV is pretty confident that, with indexes counting more and more, it’s only a matter of time before they will be regulated as fiduciaries and not publishers. . .

Further reading:

— Index providers are extremely boring — and very profitable (FTAV)

— Index providers are quietly building enormous powers (FT)

— “Volmageddon” fine may hint at era of tighter index regulation (FT)