UK – Legal &General is ready to operate a capped index investment fund for institutional investors requiring broader diversification as large cap UK companies increase in size and weighting.
Barry Holman, managing director index funds at L&G, told IPE that the firm has been discussing the creation of a capped index fund with Mercer Investment Consulting.
“We can construct it the_fund from the way we manage assets,” Holman said. “We have the product set-up. It is on the shelves, ready to be pulled and we are ready to do it.”
A “material number of institutional clients”, particularly those advised by Mercer, have shown an interest in the product but no mandate has yet been awarded, he said.
“With somebody like Mercer promoting a capped index fund_f it will not be long before somebody does it,” Homan said. The capped index fund is likely to appeal to both local authorities and corporate pension funds, he added.
The project coincides with the FTSE Group’s announcement that it will produce a 5% capped version of the FTSE CAP 100 and All-Share indices.
The impact of excessive stock concentration is the theme of a study by Mercer, which has called for trustees to be aware of stock concentration in the FTSE All-Share Index.
FTSE stressed that the 10 largest companies comprise 43% of the FTSE All-Share Index’s market capitalisation.
The consultant also pointed out that Shell’s weighting in the index could increase from around 3% to more than 7% if its unification with Royal Dutch into a single listing is approved.
Exposure to Shell would then double in passively managed UK equity funds, resulting in less diversified investment portfolios.
Excessive stock concentration can increase the vulnerability of pension funds to changes affecting certain companies or sectors, said Andrew Green, head of investment strategy at Mercer.
The FTSE CAP 100 5% Index and the FTSE CAP All-Share 5% Index will start on 20 June. The companies in the indices will be the same as the standard FTSE 100 and FTSE All-Share indices, but constituents will be capped at 5%.
Imogen Dillon Hatcher, managing director, FTSE EMEA, said: “The new FTSE Capped 5% indices will provide investors with the tools to measure and rebalance their portfolios in line with this specific requirement."