By Kira Nickerson Clerical Medical believes the introduction of free float indices in 2001 will help...
By Kira Nickerson
Clerical Medical believes the introduction of free float indices in 2001 will help alleviate some of the problems encountered by UK institutional fund managers who follow their benchmarks too closely.
In its response to Paul Myner's consultation paper on the problems facing pension fund investments, Clerical Medical said the increasing pressures on fund managers to deliver performance is being exacerbated by the increasing role of tracker funds.
Will Claxton-Smith, director UK equities at Clerical Medical, said: "The mechanistic nature of tracker funds combined with the limited free float of a number of constituents within the index has led to distortions in stock prices, aggravated by active fund managers including ourselves, pursuing index benchmarking strategies."
Changes have been announced to the UK series of the FTSE Actuaries Share indices, which will restrict the index weightings of companies with limited free floats and partly alleviate this problem.
He said the rules to be applied to existing constituents of the FTSE indices from 18 June 2001, still fail to reflect accurately the true free float.
He added: "We have already seen an instance of company directors selling stock to increase the free float to 51% therefore gaining a 75% index weighting."
Claxton-Smith said the Myner's report concentration on the lack of UK pension fund involvement in venture capital will divert attention away from the real issue of lack of overall diversification by funds.
The consultation paper had suggested UK pension funds were only investing one-tenth of the investment US pension funds do in venture capital funds. Clerical Medical said the focus on venture capital may lead to an unhelpful narrow focus, especially as the comparison to the US in itself is open to question.
Institutional investors in the UK have, by international standards, invested in higher risk assets such as domestic and overseas equities, Claxton-Smith said. This acts as a counter to charges that US pension funds invest more in venture capital schemes, especially as the majority of these assets appear to be directed toward management buy-outs of established businesses rather than to the early stage funding of new enterprises.
He said: "There is little evidence that new ventures in this country struggle to raise capital. Our experience in venture capital suggests quite the opposite, namely that there are a lack of suitable investment opportunities, illustrated by the slow draw down of committed capital in many of our chosen venture funds."
Distortions already exist within the investment industry, Claxton-Smith said, arguing that it would also be a distortion to encourage excessive investment in one particular part of the economy. One way in which institutions play a part in capital provision to industry is through the property market, he added.
In common with other alternative classes of investment, this is an area where life companies have been quite active than other institutional investors, however, stamp duty has made this a less attractive market in which to invest, Claxton-Smith said.
Clerical Medical has also criticised the possible greater adoption of performance related fees for fund managers, believing this could lead to managers taking far greater risks with investors' money than is acceptable within a pension fund.
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