UK: ON THE TRACK OF FOOTSIE. - The index is difficult to match - and not easy to follow.

Last Updated: 31 Aug 2010

The index is difficult to match - and not easy to follow.

Does the Financial Times-Stock Exchange 100 index serve a useful purpose, and if so, how useful? Launched in 1984, and superseding the old Financial Times index of London's 30 biggest industrials measured by market value, the Footsie 100 is supposed to mimic the stock market as a whole. The index is weighted in such a way as to reflect the greater influence of the price movements of large stocks as compared with smaller ones, it is adjusted almost continuously, and its composition is updated every three months as some stocks rise in favour and others drop out of the magic 100.

At present the Footsie accounts for roughly three-quarters of the value of the entire UK market. (The proportion depends on how large companies fare as against small ones - last year the giants outstripped the dwarfs.) It would grow even bigger if foreign investors poured more money into UK companies. Some foreign funds are so massive that only the biggest UK stocks have enough shares in issue for them to buy.

Hard on the heels of the Footsie came the tracker funds. Launched by City institutions, these sought to emulate the Footsie for the benefit of private investors and pension funds. Investors had discovered that most fund managers failed to match Footsie, let alone beat it. The tracker funds were easy to set up on computer, they were cheap to run - unlike fund managers and securities analysts - and their growth was spurred on by the spread of personal equity plans (PEPs).

The table was set for the Footsie to feed on itself.

Robin Griffiths, a chartist at HSBC Markets, thinks that people set too much store by the Footsie: 'Only lucky fund managers can mimic the index.' And the investor, who presumably has to pay stamp duty, is 0.5% down on every transaction he makes trying to keep pace with the quarterly changes in its composition. Besides, 'the Footsie is a good news index - but good news is only half the story.' But are the tracker funds putting the City experts out of business? Griffiths doesn't think so. 'Clients increasingly want portfolios tailored to specific requirements. They want these portfolios tilted towards certain kinds of shares or stock markets.'

Michael Hughes, research chief at securities house Barclays de Zoete Wedd, agrees totally that 'Footsie trackers are no longer enough. Clients increasingly want funds geared to, say, income or capital gain, or to safe, defensive stocks or, indeed, to risky ones.' Further, the index may have a distorting effect on the price of particular shares. 'It's clear that hopes of joining the Footsie - and fears of leaving it - do influence a company's share price,' says Hughes.

Bob Stewart is finance director of the catalogue retailer Argos, which recently joined the Footsie club. 'Our shares did well for a month or two before we entered Footsie, on hopes that we would indeed join,' confirms Stewart - although this was not the only reason since the company was performing well at the time. 'Once Argos became a Footsie stock our shares quietened down.'

These days speculators, and investors wanting to insure against loss, are more and more betting on future Footsie levels which, depending on their cheer or gloom, gives the index an extra kick up or down. All of which suggests that Footsie has a life of its own - and one that could become increasingly unpredictable.

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