By Jenne Mannion Most All-Share and FTSE index trackers are using debentures to get full market weig...
By Jenne Mannion
Most All-Share and FTSE index trackers are using debentures to get full market weighting to Vodafone.
Following its merger with Mannesmann, the new enlarged Vodafone company will account for 15% of the FTSE 100 and 13% of the FTSE All Share Index, above the 10% weighting in a single stock unit trusts are allowed under Ucits.
The use of a debenture to make up exposure above 10% was first reported in Investment Week last week.
Other options available to trackers include using FTSE indices capped at 10% maximum for a stock, or else increasing weightings to other stocks in the same sector.
Following discussions with the FSA, HSBC Investment Bank and Deutsche Bank have issued structured notes which mimic the performance of Vodafone.
These equity-linked structured notes are issued in one and two year versions and are paid off at maturity, at a level reflecting any gains or losses in Vodafone over that period.
Tony Whalley, investment director at Scottish Widows, said his company had already moved to buy debentures, in a bid to properly mimic the FTSE indices.
He said: "We believe however that the FTSE capped indices makes sense and if this goes ahead as planned we will give our clients the choice of having their money track the index under either system."
He confirmed that Scottish Widows would launch a series of new products to track the capped indices, therefore giving customers the choice to replicate either the real index or the capped index. He said work would start on these new products promptly after the FTSE capped indices go live, and existing clients would be notified of the options. Gordon Maw, marketing manager at Virgin, said its tracker funds would invest the first 10% of the assets in Vodafone, then for the excess, would use structured debenture products, issued by Deutsche Bank. Legal & General was the only fund management house to confirm it would use the FTSE capped indices while Royal & SunAlliance, said it was taking the debenture route.
Some fund management houses have not yet decided which option they will employ, including BGI Funds and Equitable Life.
One result of Vodafone's high weighting could be to encourage a switch to a larger benchmark index. The company is the second largest stock in the pan-European Bloomberg 500 index with a weighting of 3.654%, behind Deutsche Telekom.
The S&P 500, which has a far larger collection of global businesses than FTSE, similarly lacks a problem of too little diversification. The largest stock in it is Microsoft with 4.338%, followed by General Electric at 3.802%.
Like the FTSE the Nikkei 225 suffers from a high concentration among the very largest stocks. Sony makes up 13.462% of the index followed by NTT Data Corporation at 9.228%.
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