As Vodafone becomes the biggest company on the London Stock Exchange, fund managers have to deal with...
There are solutions available, but they will not reverse the trend that is forcing technology, telecom and media companies closer together in the fight to carve up the burgeoning mobile entertainment market.
David Stevenson, investment director with Scottish Value Management, says: "When you start getting stocks that are more than 10% of the index there is a problem.
"These are pan-European companies that dwarf the size of the stock market they are listed on."
Many funds have strict limitations on the weighting of any one stock, as well as a benchmark against the index.
One possible solution to this problem would be for some of the major indices to cap the Vodafone weighting at 10%. This kind of intervention will necessarily skew the index, but it will prevent the need to rewrite prospectuses and get the support of the unit/shareholders.
There is an added problem for big funds. Even with a capped weighting, they could have a great deal of trouble finding enough stock to allow them to stay close to their benchmark.
Stevenson believes that the increasing level of M&A activity is a trend that will continue in the public, mass market arena. The media, technology and telecommunications sectors are beginning to overlap in so many areas that there will be sustained commercial pressure for the integration of communications, infrastructure and content.
While UK companies are looking to expand into Europe, there is potentially more room in the other direction.
Jeffrey Taylor, fund manager for Perpetual, says: "There are more big cap tech stocks in continental Europe. M&A activity as a proportion of market cap is higher in Europe than in the UK."
Vodafone has an agreement with Vivendi that guarantees access to the output of Canal Plus, the French program maker. The eventual idea is to set up a portal so that the consumer will be able to access TV content from a mobile.
Stevenson says: "Companies need the content in order to recover their investment in the technology."
To make a real return on investment, a company has to appeal to the mass market.
This means producing low margin, easily accessible products, whether in software or entertainment, with widespread distribution.
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