The skewed nature of the FTSE 350 High Yield Index is creating problems for fund managers who benchm...
The skewed nature of the FTSE 350 High Yield Index is creating problems for fund managers who benchmark against it. The index is particularly in use by managers of split capital investment trusts.
James Henderson divisional director of investment trusts at Henderson Investors, says: "The FTSE 350 High Yield is not a very good index. It is configured from the FTSE 350, taking the top-yielding companies and weighting them according to market capitalisation. There are a lot of banks and oils that make up the index. As a result of the way it is formed you have to hold very large weightings in some stocks such as BP."
Companies in the FTSE 350 High Yield are listed in order of yield. The index is cut off when the stocks in it have a total market cap equal to half that of the FTSE 350.
So if a large company performs well then its yield goes down, it could be excluded from the index, leaving a space that might be filled by a larger number of small companies.
Richard Prvulovich, UK equity fund manager for Investec Guinness Flight, says: "The number of companies in the index can be a moveable feast. Our best bet as a true benchmark over the long term is 50% FTSE 350 High Yield and 50% FTSE All-Share."
This combination is used as the benchmark for Investec Guinness Flight's Temple Bar Investment Trust, with assets of £460m. The trust is in the FTSE Mid 250 and is itself in the High Yield index. Prvulovich thinks there are large distortions in the index. At the beginning of the year, oil was priced at $10 a barrel but now it is around $18 per barrel so oil companies have done exceedingly well. The best example of this is Shell, whose stock has nearly doubled in that time. This has caused a shift in the high yield index.
Henderson doesn't like the index as a benchmark because of the large positions required in certain sectors. Oils currently make up a fifth. BP Amoco is the biggest player at 15% and Shell occupies 7%. Conversely, pharmaceuticals and telecoms are barely present.
Prvulovich says: "We've got to manage portfolios on the basis of total returns. We can't just chase yields at the expense of capital growth. If a company has a high yield there is no guarantee that it is sustainable.
"Our absolute bottom line is to make growth inflation protected but our real aim is to match or better the All-Share while maintaining a good, sustainable yield."
Prvulovich tries to run his portfolio at 130% of the average All-Share yield.
He says: "We were 140% to 145% a few months ago. The yields were so high because the stocks were on their knees. That will come down now as they are revalued."
His solution is to choose companies that are economically sound and give a decent yield but are undervalued. The theory is that the market will take care of the growth aspect by eventually adjusting the stock prices up to their correct value.
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