FTSE International has launched a new ‘multinational’ index series comprising a broad benchmarking multinationals index and a range of local and regional indices. Helped by major cross-border mergers such as AstraZeneca, BP Amoco and DaimlerChrysler, the number of multinationals has been growing. FTSE’s new index aims to provide a level playing field for these new giants.
The series, developed in conjunction with Bacon & Woodrow and Barclays Global Investors, has been requested by 69% of institutional investors, says FTSE International. “They wanted index benchmarks that more accurately reflect the economic environment in which companies exist,” it says.
“Investors’ holdings in multinational company stocks are becoming divorced from the economic geography of the underlying businesses and are instead being driven by sometimes meaningless country classifications,” it says, adding that the new indices are designed to address this problem.
The FTSE Multinationals Index Series is made up of 11 indices, including the FTSE Multinationals index and the FTSE Global 100. The multinationals index includes 506 multinational companies from around the world while the Global 100 covers the top 100. For the purposes of the index, a multinational is defined as a company which has more than 30% of its sales from outside the economic region in which it is incorporated.
Other components of the index series are the FTSE World ex Multinationals Index, the FTSE All-Share ex Multinationals and local indices for the UK, Europe, Europe ex UK, Eurobloc, USA, Japan, Pacific ex Japan. The local indices, which exclude multinationals, can be used as a benchmark to give the desired level of home bias in a portfolio, FTSE International says.
At the moment fund managers run into problems when their research is carried out on a global basis but country-based indices form their benchmarks. Analysts make stock decisions between multinational companies operating in global industries, but the requirements of the benchmark may be to bias investments towards certain country indices, says FTSE.
Sally Bridgeland, head of investment research at Bacon & Woodrow, says: “If you look at the typical equity portfolio of a UK pension fund, about 47% of the equity portion is already invested in multinationals, but it is very much biased towards the UK... that is causing quite a concentration, with a third of some portfolios invested in 10 shares, making them quite vulnerable to any one company's economic fortunes.”
In cases like this, the fund could set up the multinationals index as a separate benchmark, she suggests.