European finance ministers have agreed that index funds should be able to hold up to 20% in a single...
European finance ministers have agreed that index funds should be able to hold up to 20% in a single stock, writes Ruth Alexander.
The agreement, which comes after seven years of discussions, stipulates that the rule limiting investment in a single stock to 10% should be raised to 20% for index tracking funds, and that in exceptional circumstances, up to 35% of one stock may be held.
The new rule will not take effect in the UK for at least two years. There is a review in March 2001, and if agreement is reached, member states will have 18 months to implement the change.
Autif opposed the motion, which applies only to index tracking unit trusts and Oeics, but the UK was in a minority of one. Autif will not be able to reverse the decision due to its minority position.
Sheila Nicoll, director of legal and fiscal affairs at Autif, said: "The investment funds industry made its name from the diversification rule of 10%. It is wrong to increase the limit of asset allocation to 20% as this could potentially mean that only five stocks are held in a fund."
Autif favours the present rule, which will still apply to active funds, whereby up to 10% of a stock can be held, although not more than 40% of a portfolio can be made up of stocks with individual weightings between 5% and 10%.
The 10% rule, derived from a 1985 European directive, came into effect in Britain in 1988.
Nicoll said the new rule could cause a distortion in the market by differentiating between active and passive funds.
She said investors might not necessarily understand the diversification issues surrounding passive funds, which would be permitted to hold fewer stocks, pointing out that passive funds are often chosen by first time investors for their perceived safety. Nicoll added that these funds may now actually be the least diversified on offer and thus be a less safe investment option.
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