Indexers make room in portfolios for Berkshire Hathaway

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The addition of Berkshire Hathaway Inc to the S&P 500 index after the market close on Friday is expected to drive up the stock's price this week and result in record index-related trading volume.

Portfolio managers who track the S&P 500 will be forced to buy Berkshire's shares just as it is scheduled to be added to the index, which could result in a flurry of volume in the shares at the end of trading Friday, according to Credit Suisse analysts. Because of the sheer size of Berkshire, indexers will have to buy an unusually large number of shares to adjust their portfolios.

There "will be a spike in volume as they basically flip those shares over on the day of inclusion at the end of the week," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

Traders attempting to take advantage of the index-related buying could bolster Berkshire's share price as they buy Berkshire's stock during the week to flip to fund managers who will buy in on the day of inclusion.

Berkshire is to replace Burlington Northern Santa Fe Corp in the S&P 500.

Credit Suisse estimates that indexers alone could purchase 180 million Class B Berkshire shares. The stock is set to become the 19th largest in the S&P 500 and the fourth largest financial stock, according to the brokerage.

The sheer size of Berkshire, which has a market capitalization of USD 170 billion, could create an estimated USD 14 billion funding trade, which would be a record, according to Standard & Poor's index analyst Howard Silverblatt.

But the recent pullback in the S&P 500, which has fallen nearly 8% from a high on Jan. 19, could mute the impact on other shares because fund managers may not have to sell holdings to fund purchases of Berkshire.

"Cash was raised in the recent decline as people moved money to the sidelines," said Pado. "A lot of funds already raised a lot of capital so that it wouldn't have the impact you might otherwise have seen."

That trend will remove a potential negative from the market, which may have weighed if more managers were fully invested.

Berkshire's Class B shares have risen over 9% since Standard & Poor's said it would add the stock to the S&P 500 in late January.

Because much of the stock is held by long-term investors, including its billionaire chairman and chief executive, Warren Buffett, they may demand a higher price to sell.

But even though the shares are expected to tick up going into this Friday, they could give back some of those gains next week after portfolio positions are adjusted.

"The positive bias is going into it and the negative bias is coming out," said Pado. "So next week, may be a little negative bias."

In addition to joining the S&P 500, Berkshire will be added to the S&P 100 index of the largest blue-chip companies after it acquired Burlington in a USD 26.4 billion stock-and-cash transaction.

Omaha, Nebraska-based Berkshire split its B shares 50-for-1 to make it easier for Burlington investors to swap their shares for Berkshire shares.

Despite its size, Berkshire was long excluded from the S&P 500 because its shares were not liquid enough. It was the largest publicly-traded U.S. company not in the index.