Old economy stocks promoted into the FTSE 100 Index are likely to underperform while the FTSE Mid 25...
Old economy stocks promoted into the FTSE 100 Index are likely to underperform while the FTSE Mid 250 will move ahead, bolstered by the additions of the fallen tech stocks, according to Darren Brooks a quantitative strategist at Schroder Salomon Smith Barney (SSSB).
SSSB has analysed the performance of all stocks that have advanced into the FTSE 100 since 1983. The group's findings show that the average stock had outperformed in the six-, three- and one-month periods before being upgraded. Following an elevation, however, most stocks underperformed in the next one-, three- and six-month periods, Brooks said.
He added: "Similarly, stocks that have been relegated from the FTSE 100 tended to outperform after the demotion, particularly in the one-month period."
He noted that this trend has been true over the long term, but particularly evident over the past year. The SSSB analysis suggests that a successful strategy would be to buy stocks once it is known they are to join the index and sell as soon as they have actually joined.
Brooks uses the more relevant example of Baltimore Technologies, which has been promoted or relegated in the past four quarterly reviews. Brooks said: "It joined the index after the December 1999 review, climbed into the FTSE 100 in March 2000, fell back into the mid-cap index the following June and returned into the FTSE 100 in the September. Each time Baltimore has been upgraded to the FTSE 100 it has subsequently underperformed and vice versa when it has dropped back to the mid-cap index."
A portfolio selling stocks joining the FTSE 100 while buying those leaving the index over the past four reviews would have outperformed by 12% relative to the All-Share over the period, according to Brooks. This performance pattern runs counter to the argument that FTSE 100 membership pushes up share prices due to enhanced demand from trackers. Brooks said: "The theory that stock performance after entering or leaving the FTSE 100 will be affected by index trackers lacks substance when analysed. Most major index tracking funds will choose a broader index to track, apart from some retail index trackers. Many All-Share trackers will hold all companies in the FTSE 350 and will optimise holdings among the small caps. We might also see effects from active fund managers as stocks move from the small cap into the mid cap, and vice versa, and appear on the radar screen of a greater proportion of fund managers."
Andy Crossley, head of UK smaller companies team at Invesco, said: "The importance of these rebalances are overstated. Something in the region of 80% of tracker funds track the All-Share, not the FTSE 100. Being upgraded certainly increases the visibility of a company, but I am not convinced of the significance of such moves."
The negative market sentiment on technology was reflected in the rebalance last week, which is effective as of 18 December 2000. Three technology stocks dropped into the FTSE 250, while only one new economy business made the upgrade into the FTSE 100. Technology has been losing investor interest as there are concerns over valuations and future earnings.
The five stocks that are now to be included in the FTSE 100 are Associated British Foods, Autonomy, Rolls-Royce, Safeway and Smiths Industries. Associated British Foods was the largest to move up with a market cap of £3.8bn. The only tech stock to enter the FTSE 100 is Autonomy, the software group with a market cap of £3.5bn.
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