FINANCIAL TIMES: Index dropped as trust benchmark: “Investor disquiet at the growing concentration of the FTSE All-Share Index was highlighted yesterday when City of London Investment Trust said it was dropping the index as its benchmark.”: “Clearly, much depends on the share price performance of giants such as Shell.” (ShellNews.net) 20 April 05
By Philip Coggan
Published: April 20 2005
Investor disquiet at the growing concentration of the FTSE All-Share Index was highlighted yesterday when City of London Investment Trust said it was dropping the index as its benchmark.
The trust, the largest in the growth and income sector, is concerned about the increasing domination of the index by a few heavyweight stocks. When the two classes of share in Royal Dutch/Shell merge, the oil company will form 8 per cent of the index and the five largest companies 34 per cent. That is an even greater concentration than in 2000, when Vodafone was briefly more than 10 per cent of the index.
In a statement, the trust's board said: "It would not be prudent for City of London's portfolio to be concentrated in a small number of stocks in the way in which the All-Share Index is now concentrated. At the end of December 2004, only two stocks each represented more than 5 per cent of the (City of London) portfolio."
The trust has accordingly asked FTSE International to create a version of the All-Share index in which no single stock has a weighting of more than 4 per cent. Job Curtis, the trust's fund manager, says that over history the largest stock in the index usually had a weighting of around that level. Ten years ago, the largest stock in the All-Share had a weighting of 3.5 per cent and the five largest comprised 15.3 per cent of the index.
The choice of benchmark matters for shareholders, since Henderson Global Investors, which manages City of London, is paid a performance fee based on its ability to outperform the index. Job Curtis says the new benchmark has outperformed the All-Share in each of the past five years and the board accordingly thinks it will be more difficult for the manager to earn the extra fee. The new benchmark will be adopted when the trust's next financial year begins, on July 1.
Clearly, much depends on the share price performance of giants such as Shell.
GlaxoSmithKline and BP. In recent years, smallcap stocks have tended to outperform the blue chips, helping active managers such as Mr Curtis beat the index. Should the trend reverse, the All-Share index could prove a harder taskmaster. Active managers struggled to outperform indices in the late 1990s, when a small number of large companies shot up in price. At the time, fund managers who attempted, explicitly or implicitly, to track the indices were criticised for buying shares, regardless of valuations, and thereby fuelling the dotcom bubble.