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The BBC's Simon Gompertz
Vodafone's size is creating problems for fund managers
 real 28k

Friday, 4 February, 2000, 12:10 GMT
The giants who move markets

Dealers 300 Heavy trading in one company can affect investments

One of the key factors in hammering out the deal between Vodafone AirTouch and Mannesmann was what stake the respective shareholders would have in the new company.

Mobile merger battle
But they are not the only ones who will be taking a keen interest in how the resulting telecoms giant performs in the future.

The company's successes - or failures - will also impact on many smaller investors, those who put their money into tracker funds.

These follow the fortunes of share indexes, and it is estimated that they own one in every five shares.

But the increasing trend for mega-mergers means the fate of the fund depends more and more on just a handful of companies.

A number of UK funds track the FTSE 100 Index of leading shares on the London stock market.

But the top 10 of those companies account for about 40% of the index's value.

Gent 150 Could Chris Gent's deal affect your investments?
And the new Vodafone business alone, which will be worth 228bn ($365bn), will make up 15% of the FTSE 100.

The fortunes of just one firm can have a significant influence on the performance of the index.

On Friday, 50,000 Vodafone shares changed hands every second. The company's value fell by nearly 6% - down 22p to 346p - contributing to the FTSE 100's fall of 139 points to 6,185.

Yet the broader-based FTSE Mid 250 Index finished down only 18.3 at 6,148.

The same thing happened to the FTSE 100 on Wednesday, when another stock market titan, BT, lost one-fifth of its value.

Justin Urquhart Stewart of Barclays Stockbrokers says there is no doubt that these huge companies are skewing the index, sometimes overshadowing how other companies are performing.

Justin Urquhart Stewart Justin Urquhart Stewart: Index is skewed
"If you look at Glaxo Wellcome, HSBC, BP Amoco, Lloyds TSB, these are massive international businesses and they have to be big to compete on the world market," he says.

"London is the most international market because it is more open, and that's why big firms from other countries want to be listed."

The trend in globalisation is leading some financial experts to advise clients to rethink their investment strategy.

"Tracking is still a good concept, but go for an all-share tracker, which gives you a wider spread of about 850 companies," says Ian Millward of Chase de Vere.

"The sort of investor who buys a tracker fund tends to be a little more cautious because there is less risk of a fund manager making bad decisions.

Change to rules

"But now a wrong decision by a really large company in a competitive environment can change everything."

Mr Millward added that the rules governing unit trusts might have to be rewritten as there was currently a cap on the size of the major holding, and some merged businesses were now bigger than the limit.

It is not just those investing directly in the market who could be affected.

Pension funds have been warned that Vodafone's size could take it out of secure investment limits.

Underperformance by such a big company could influence the retirement pension paid out by some funds.

New indices set up

There was a similar warning last year when BP Amoco merged with Arco. Funds were advised they could be overexposed to oil stocks in the UK.

Actuarial consultant Bacon & Woodrow recommends that no more than 5% of a fund is in any one company.

To counter this problem, new multi-national indices are being established, based on where companies earn their money rather than just their size.

For example, BP acquired Amoco and is pursuing Arco, both with US listings. Yet BP Amoco now accounts for around 7% of the FTSE 100.

As business continues to go global, the message to investors is clear - don't put all your eggs in one mega-corporate basket.

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See also:
04 Feb 00 |  Business
Vodafone seals Mannesmann deal
18 Jan 00 |  Business
Vodafone UK's biggest company
05 Jan 00 |  Business
Record year for mergers

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