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Impact of Index Changes on Bangladesh Stock Market: Analyzing the DSEX's Recent Adjustments and Their Implications

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 28 Feb, 2024

I started investing in stocks in late 2007. Back then the broad stock market index was called DGEN. DGEN was a total market cap-weighted index of all shares. The DGEN was a flawed index as it systematically underestimated the index changes.

To correct this problem, in 2013 the DGEN was replaced by DSEX which was a free-float weighted market cap index. This was the right move as DSEX was calculated properly. The only problem was that this index started in 2013 and was never calculated for previous years. So investors had no way to determine long-term equity market performance due to lack of data. (We created our index to be able to solve this problem but that is a different discussion)

Recently, in January 2024, the Dhaka Stock Exchange removed 83 stocks including 15 banks from the DSEX citing index methodology. The list of removed names included some prominent names like IDLC, Mutual Trust Bank, RAK Ceramics. Regardless of the reason for these eliminations, the decision does have some major ramifications.

1. Firstly, we no longer have an all-shares index. To measure the performance of stocks an all-shares index is very important.

2. Secondly, the DSEX has ceased to become meaningful. As an example, the Chittagong All Shares Price Index (CASPI) is down around 5.8% YTD while DSEX is down 2.1%. Note that the two indexes have very similar composition and hence the performance of the two should not be so different.

3. This leads to further problems for the performance evaluation of fund managers. For example, most equity fund returns will look quite bad compared to DSEX returns (which is now overestimating performance at the moment somewhat ironically). Without a proper benchmark, we don't have a proper measure of alpha and hence investors have no way of ascertaining if their fund manager (mutual funds) is worth paying fees to.