Consulting » Trackers get shares down.

Trackers get shares down.

Stocks joining the FTSE-100 tend to underperform the market - those leaving outperform it. Odd.

Passive fund management may be even more passive than previously thought, according to some research from securities house Salomon Smith Barney. In a circular published in December, they claim that the long-believed notion that index tracking funds will influence the performance of stocks entering or leaving the FTSE-100 index “appears to be without substance”. On average, they say, stocks joining the index tend to underperform the overall market while stocks leaving the index tend initially to outperform and then move in line with the All Share index. Just one striking example is Sema group, which has seen its shares move in such a way that the company has twice been demoted from the FTSE-100 shortly after joining it. They add: “So far this year, every stock that has joined the FTSE-100 index from the Mid Cap index has subsequently underperformed the All Share over the next three months.” The reason index funds don’t buy up new entrants in such quantity that their shares outperform, they say, is that most fund managers track broader indices, such as the All Share or perhaps the FTSE-350. However, in contrast, companies that get promoted into the Mid Cap index tend to outperform the market: ultimately, on average, they beat the market over six months by 4.5%. The researchers at Salomon Smith Barney say that one reason may be the way active fund managers split their teams into a large cap team that looks at the FTSE-350 and a separate team for smaller companies: “It may well be that, as a stock moves into the Mid Cap index, it is picked up by the large cap team’s ‘radar screen’ and becomes eligible for investment consideration.”

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