Adjusted long term float

What Is Adjusted Long-Term Float?

Adjusted Long-Term Float refers to the portion of a company's outstanding shares that are readily available for trading in the public equity markets over an extended period. This metric is a refinement of the more general "free float" concept, specifically accounting for shares that, while not explicitly locked up, are held by entities with long-term, strategic interests and are therefore unlikely to be traded actively. It plays a crucial role in index construction and other analyses within capital markets, falling under the broader category of Equity Market Structure.

The primary purpose of calculating Adjusted Long-Term Float is to provide a more accurate representation of a company's market capitalization for indices and market valuation, reflecting only those shares that contribute to market liquidity and price discovery. By excluding shares held by long-term holders like founders, governments, or other corporations with strategic stakes, Adjusted Long-Term Float offers a clearer picture of the supply-demand dynamics for actively traded shares.

History and Origin

The concept of "free float" gained prominence in global equity indexing around the early 2000s. Previously, many major indices, such as the S&P 500, used a full market capitalization methodology, where all outstanding shares were included in a company's index weight, regardless of their tradability. However, this approach often led to indices that didn't accurately reflect the investable universe, as significant portions of a company's stock might be held by entities with no intention of selling, effectively inflating its perceived market significance for public investors.

Major index providers like MSCI and S&P Dow Jones Indices began transitioning to free-float adjusted methodologies to address this discrepancy. MSCI, for instance, announced in 2001 that it would recalibrate its global equity indices for free float, recognizing the need to represent the portion of shares actually available to the market.⁸ This shift aimed to create more investable and representative benchmarks for institutional investors and passive investing vehicles. Over time, the understanding evolved to further refine this by considering the long-term nature of certain non-float holdings, leading to the more granular concept of Adjusted Long-Term Float. S&P Dow Jones Indices, for example, assigns an "Investable Weight Factor" (IWF) that reflects the proportion of shares available for trading, excluding various types of closely held shares.⁷

Key Takeaways

• Adjusted Long-Term Float measures the shares of a company truly available for public trading, excluding shares held by long-term or strategic owners.
• It provides a more accurate base for calculating a company's weight in market indices, enhancing their representativeness and investability.
• Shares typically excluded from Adjusted Long-Term Float include those held by founders, governments, other corporations with significant stakes, and certain restricted securities.
• The methodology aims to improve market efficiency by reflecting only the supply of shares actively traded.
• Changes in a company's Adjusted Long-Term Float can significantly impact its index weighting and, consequently, its stock price, as index-tracking funds adjust their portfolios.

Formula and Calculation

While there isn't a single universal "formula" for Adjusted Long-Term Float that applies across all contexts, the calculation generally begins with total outstanding shares and systematically subtracts categories of shares considered "non-float" or "stagnant" by index providers. The core principle is to identify and remove shares that are not readily available for trading in the public market.

The general approach can be represented as:

$\text{Adjusted Long-Term Float Shares} = \text{Total Outstanding Shares} - \text{Non-Float Shares}$

Where "Non-Float Shares" typically include:

• Shares held by strategic investors, such as controlling shareholders, founders, and their immediate families.
• Shares held by governments, government agencies, or public sector bodies.
• Shares held by other corporations (cross-holdings) for strategic purposes.
• Shares subject to lock-up agreements following an Initial Public Offering (IPO) or secondary offerings.
• Shares categorized as restricted securities under regulations like SEC Rule 144.⁶

Index providers apply specific rules for determining what constitutes "non-float." For example, MSCI defines the free float as the proportion of shares outstanding available for purchase by international investors, classifying shareholdings based on whether they are strategic or non-strategic.⁵ S&P Dow Jones Indices considers holdings by other publicly traded companies, government agencies, or certain types of strategic shareholders as excluded from float.⁴

Interpreting the Adjusted Long-Term Float

Interpreting the Adjusted Long-Term Float involves understanding its implications for a company's true market influence and the investability of its stock. A higher Adjusted Long-Term Float indicates that a larger proportion of a company's stock is available for public trading, leading to greater liquidity and potentially more accurate price discovery. Conversely, a low Adjusted Long-Term Float suggests a concentrated ownership structure, where a significant portion of shares are not actively traded.

For investors, particularly those in investment vehicles that track major market indices, the Adjusted Long-Term Float is critical. It directly influences a company's weighting in float-adjusted indices. If an index provider determines that a large block of shares is part of the long-term float (i.e., not freely tradable), that company's effective market capitalization for index purposes will be reduced. This can lead to a lower weighting in the index, which in turn means index-tracking funds will hold fewer shares of that company.

Hypothetical Example

Consider a hypothetical company, "Tech Innovations Inc." (TII), with 100 million total outstanding shares.

1. Total Outstanding Shares: 100,000,000
2. Shares held by Founder & Family (strategic, long-term): 20,000,000
3. Shares held by Government Pension Fund (strategic, long-term, not actively traded): 15,000,000
4. Shares held by a Sister Company (cross-holding for strategic alliance): 10,000,000
5. Shares subject to Rule 144 (restricted for executives): 5,000,000

To calculate the Adjusted Long-Term Float, we subtract the non-float shares from the total outstanding shares:

Non-Float Shares = 20,000,000 (Founder) + 15,000,000 (Government Fund) + 10,000,000 (Sister Company) + 5,000,000 (Rule 144 shares) = 50,000,000 shares.

Adjusted Long-Term Float Shares = 100,000,000 (Total Outstanding) - 50,000,000 (Non-Float) = 50,000,000 shares.

In this example, only 50 million of TII's 100 million shares are considered part of its Adjusted Long-Term Float. If an index were to include TII, its weighting would be based on these 50 million shares, not the full 100 million. This significantly impacts how much of TII an index construction fund would hold, reflecting the actual tradable supply.

Practical Applications

Adjusted Long-Term Float is a critical concept with several practical applications across financial markets:

• Index Calculation and Weighting: The most significant application is in the determination of a company's weight in major stock market indices. Leading index providers like MSCI and S&P Dow Jones Indices use free-float adjusted methodologies to ensure that indices accurately represent the investable market. This means that a company's influence in an index is based on its Adjusted Long-Term Float, rather than its total market capitalization. As a result, funds that track these indices, particularly large passive investing funds, will adjust their holdings based on these float-adjusted weights.³
• Market Liquidity Assessment: Adjusted Long-Term Float offers a more realistic measure of a stock's actual trading liquidity. Shares not included in the float are unlikely to be traded, meaning the effective supply of shares for public transactions is lower than the total outstanding. This helps analysts and investors gauge how easily a stock can be bought or sold without significantly impacting its price. Research from the Federal Reserve has explored various facets of market liquidity and its implications for financial stability.²
• Regulatory Compliance and Reporting: For companies, understanding their Adjusted Long-Term Float is important for compliance with listing requirements on stock exchanges, many of which mandate a minimum percentage of shares to be publicly held. Additionally, for shareholders with large, non-float holdings, sales of such shares are often subject to specific rules and volume limitations, such as those outlined in SEC Rule 144, which governs the resale of restricted securities and control securities.¹

Limitations and Criticisms

While Adjusted Long-Term Float offers a more refined view of a company's tradable shares, it is not without limitations or criticisms:

• Subjectivity in Classification: Determining which shares are genuinely "long-term" or "strategic" and thus excluded from the float can involve a degree of subjectivity. Index providers apply their own methodologies, which may lead to slight variations in a company's Adjusted Long-Term Float across different indices. For example, some methodologies might exclude holdings above a certain percentage, while others might focus on the type of shareholders (e.g., government, corporate, individual founders) regardless of the size of their stake.
• Dynamic Nature of Holdings: The long-term nature of some holdings can change. A strategic investor might decide to divest, or a government might privatize an entity, suddenly converting a large block of non-float shares into actively tradable ones. These shifts necessitate recalculations and can lead to significant rebalancing events in indices, causing temporary market volatility.
• Impact on Price Volatility: A very low Adjusted Long-Term Float, while potentially making the stock more sensitive to trading volume (as fewer shares are available), can also mean that large, sudden sales of what were previously considered "long-term" holdings could disproportionately impact the stock price. This can create challenges for maintaining market efficiency if information about such changes isn't transparently and timely disseminated.
• Data Availability and Accuracy: The accuracy of Adjusted Long-Term Float calculations relies heavily on publicly available shareholder information. In some markets, detailed ownership data might be less transparent, making it challenging for index providers to precisely determine the true float.

Adjusted Long-Term Float vs. Free Float

The terms Adjusted Long-Term Float and Free Float are often used interchangeably, but Adjusted Long-Term Float represents a more specific and, in some contexts, more precise interpretation of a company's tradable shares.

In essence, Adjusted Long-Term Float is a more stringent application of the free float concept, seeking to remove even more types of shares that are unlikely to be bought or sold in typical market operations. This distinction is particularly important for large-cap indices where even minor adjustments to a company's investable weight can have substantial implications for portfolio construction.

FAQs

What types of shares are typically excluded from Adjusted Long-Term Float?

Shares typically excluded from Adjusted Long-Term Float include those held by company founders, executives, and their families, governments or government agencies, other corporations with significant strategic holdings, and shares subject to specific resale restrictions, such as those governed by SEC Rule 144. These shares are considered "non-float" because their owners are not likely to trade them in the open market in the normal course of business.

Why is Adjusted Long-Term Float important for investors?

Adjusted Long-Term Float is important for investors because it directly impacts how companies are weighted in many major market indices. If you invest in investment vehicles that track these indices, such as exchange-traded funds (ETFs) or mutual funds, your exposure to a company is determined by its float-adjusted market capitalization. This provides a more realistic view of the supply of shares available for trading, influencing a stock's liquidity and its potential price movements.

How does Adjusted Long-Term Float affect stock market indices?

Adjusted Long-Term Float affects stock market indices by ensuring that a company's weighting within the index reflects only the portion of its shares that are readily available for public trading. This makes the index more representative of the investable market and helps to prevent distortions that could arise from including illiquid or strategically held shares. Index providers regularly review and adjust a company's float, which can lead to changes in its index weighting and subsequent portfolio adjustments by index-tracking funds.