Actively managed unit trusts and Oeics cannot hold a full or overweight position in Vodafone-Mannesm...
Actively managed unit trusts and Oeics cannot hold a full or overweight position in Vodafone-Mannesmann even though index funds are using debentures to gain a full exposure to the stock, writes Jane Wallace.
Mark Dickson, head of product development at HSBC Asset Management, said: "The new bonds being used by tracker funds are debentures, which are allowable investments for funds.
"However, they can also be interpreted as being a 'contract for difference', a derivative whose return is dependent upon future moves in the stock's share price. This is not a transferable security and therefore an illegal holding under regulations."
This dual interpretation allows for trackers to hold the debentures and for active funds to be barred.
Dickson said that the reasoning behind this is to do with investment objectives. He said: "Tracker funds are supposed to track an index as closely as possible, which is why consumers buy them. That objective is incompatible with a rule that limits holdings in the fund to 10% when stocks in the index have larger weightings.
"Active funds however have an objective of producing capital growth from diversified portfolios. That is not necessarily incompatible with the 10% limit."
For active managers, there is no real way of getting market weighting to Vodafone. Dickson said, under current regulations, any type of convertible or corporate bond would be added together with the equity holding to calculate the real weighting of the fund in the stock.
Meanwhile, the FSA is sticking to its guns. A spokesman for the FSA said: "We are happy for firms to talk to us, but it all depends on the nature of the fund. If it must replicate the market, then we must make sure that happens. Active funds should follow what is written down."
Now that active managers cannot hold an equal or overweight position in a stock with a market cap of 10% or more while trackers can, Dickson said that the whole debate of active versus passive investment was now fundamentally flawed, as there is no longer a level playing field.
On this basis, active managers will only find it easy to outperform to the degree that Vodafone-sized stocks underperform, and vice versa. This too raises a question over the whole concept of benchmarking against an index. If the benchmark index is so far off what an active manager can actually invest in, it has little relevance as a benchmark.
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