FINANCIAL TIMES: Benchmark reweighting: “Since the Anglo-Dutch oil major announced the merger of its two primary listings into one in the UK by July, fund managers have held on to shares in Shell Transport & Trading, reducing supply and narrowing the discount to its arch-rival.” (ShellNews.net) 16 Feb 05

Published: February 16 2005

Royal Dutch/Shell has been catching up with BP of late, but perhaps Prudential, the assurer, has more to fear. Since the Anglo-Dutch oil major announced the merger of its two primary listings into one in the UK by July, fund managers have held on to shares in Shell Transport & Trading, reducing supply and narrowing the discount to its arch-rival.

Analysis of top UK fund managers shows that by July, without further buying, they will be at least 50 per cent underweight in Shell's index weight. That is a big chunk of benchmark risk. Most will try to move back towards a market weighting.

How much fund managers will need to scrape together to do this is hard to calculate, but Merrill Lynch says it could be up to £22bn. Cash balances can furnish some of this, but they are well below their long-run average. The alternative is to sell down other holdings. That makes the stocks in which large UK fund managers are most overweight potentially vulnerable. One example is Prudential, with the UK's top funds nearly 50 per cent overweight compared with the index. Other candidates include Royal Bank of Scotland and Legal & General.

However, Shell is unlikely to have the last laugh. Royal Dutch's removal from European indices will offset much of the UK technical benefit, and the challenge of rebuilding the group's reserves means active managers may want to remain underweight. BP therefore looks set to benefit once fundamentals reassert themselves.