Technical reasons mean tracker funds are unlikely to feel much from the decimation of the gaming sector this week.
Shares in both Partygaming and 888 Holdings fell sharply, wiping billions of pounds off their combined market value after news the US is set to ban online gambling.
The six-strong Edinburgh Tracker Team at Aberdeen Asset Management is predicting both will fall out of their respective FTSE indices as soon as next week, if not by 6 December, when the next quarterly review of FTSE indices takes place.
Gary Jones, investment manager at Aberdeen Asset Managers, says the FTSE 100 will change earlier than December’s review because of a business split involving constituent GUS taking place on 11 October.
This will result in a separate listing for its Experian credit ratings business, and its Home Retail Group business – Argos and Homebase. Because of the size of these two businesses, they will remain in the FTSE 100, while the bottom ranked stock will be demoted.
That would currently be Partygaming, while its predicted drop into the FTSE 250 would force the bottom stock in that index to fall into the Small Caps index – in this case 888 Holdings would be pushed out.
Jones points to the index weightings of the FTSE 100 as reason for trackers to take a relatively benign attitude towards these events. The large holdings in the gaming firms by their management and staff means the effect on other shareholders should also be limited.
These technical reasons are echoed by L&G, which says through a spokesman its All-Share index tracker is unlikely to be affected.
Like Jones, L&G raises the issue of free float. This is essentially the question of how much of any company is actually tradeable on the exchange. Both of the gambling firms have small free floats because of management holdings.
This is important for tracker funds to consider, as they will hold proportionally larger or smaller numbers of shares in companies not only on the basis of their overall market capitalisation value, but their relative index weighting, which will be affected by the free float situation.
Most FTSE companies are not affected by free float considerations, but there are exceptions, such as BSKYB and Sainsbury’s, where significant family interests effectively put a large chunk of these companies’ shares beyond trading.
L&G adds the other main reason tracker funds will not be too upset by events of this week is the fact both companies are relatively small compared to the biggest FTSE 100 constituents.
According to L&G’s calculations, despite the nominally great fall in value of both Partygaming and 888 Holdings, the net effect in terms of its All-Share tracker fund is the equivalent of Vodafone’s share price moving by 1.5p.
Henk Potts, equities analysts at Barclays Stockbrokers, says anyone buying into a tracker fund is to an extent already spreading risk between good and bad stocks.
The point to make is those buying into a FTSE 100 tracker specifically may hold the view they are buying into UK plc, a series of well established companies. This is not necessarily the case these days, Potts says.
He too points to index weightings as a reason for limited impact on tracker funds from the troubles now hitting the gaming sector. And he adds those who run tracker funds themselves may not be too upset as they were not necessarily happy about having to buy into these businesses in the first place.
Aberdeen's Jones adds there is another part to the story in the form of arbitrage and hedge fund players. His figures suggest they currently are not holdings any significant short positions, perhaps suggesting they too were surprised by the legislative moves in the US. However, they may become more active next week as the FTSE 100 reacts to the GUS changes.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
Joined as head of strategy, multi asset, in June
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