6th December 2011
Barring last minute surprises, two Russian mining companies – and an Irish buildings material group – will move into the index while two South African companies and a UK-based satellite systems firm will depart.
The entry of the Russian miners is controversial – passive index tracking funds will be forced to buy the stocks in their exact percentage in the total FTSE 100 – pushing up prices that have already seen substantial gains over the past month.
Who are the new FTSE 100 companies?
Evraz is a steel making group associated with Chelsea FC owner Roman Abramovitch. It has a market capitalisation of some £5.3bn at the current share 405p price – up from 320p just two weeks ago. Index tracking funds are unhappy about the free float – the number of shares available to investors outside the company's directors and other substantial shareholders. This stands at 23.8% – compared to a usual 25% for FTSE entrants, although this figure has been ignored on a number of occasions, with some firms offering a free float of under 20%. .
Over 70% of Evraz shares are held by nominee company Lanebrook. Representing a number of Russian oligarchs, this company is registered in a suburban residential street in Stanmore, north London. Abramovitch owns a 33% stake in Evraz.
Polymetal is a Russian silver and gold miner which will join the FTSE 100 this week. Its shares have risen substantially since a month ago, pushing up the price against index-tracking funds which will have to buy into the stock. It has a market value of £3.9bn
Its main shareholders are Czech billionaire Petr Kellner's investment group PPF, Nesis family investment group IST and billionaire Alexander Mamut. But unlike Evraz, Polymetal is making 50% of its stock available as a free float so there is a possibility of a more even distribution of buyers and sellers than with a narrower free float.
Russian and Kazakh miner Polyusgold was slated recently as a FTSE 100 entrant but its price has slipped. Polyus plans a free float of just 20%, putting it into the same controversial area as Evraz and prompting more anger from passive investment funds. If it does make it into the top 100 this time around, it could displace UK investment firm Hargreaves Lansdown, currently worth £2.2bn.
But the third new FTSE 100 entrant is set to be Irish building materials group CRH. It has a market capitalisation of £8.8bn.
Why are investors concerned?
The Association of British Insurers, whose members own 20 percent of the UK stock market – including many index tracking funds – has previously expressed worries that firms enter the FTSE 100 too easily. It wants to put would-be entrants under closer scrutiny, both over whether the price has been inflated prior to entry into the index and over corporate governance issues for these foreign controlled companies.
ABI members are worried whether the rules best represent the interests of ultimate savers and investors as the current regime can force index-tracking funds to buy stocks they would prefer to shun on liquidity or governance grounds or both.
They accept that index trackers cannot choose – but they are lobbying for a three month cooling off period between index entry and the need to purchase the shares. This would allow the price to settle down – blowing away any index pre-entry froth.
The industry is looking in particular at whether free float requirements for FTSE entry should be raised to prevent newly-quoted companies joining the index at inflated prices, due to lack of available shares, exposing investors to early losses.
In October, Karina Litvak, head of governance at F&C Asset Management wrote to the Financial Times to say the FTSE 100 "has progressively admitted a disproportionate share of extractive companies based in jurisdictions where rule of law is often called into question" – and small free floats "raise fresh concerns about the rigour of the listing process".
But many fund managers are happy to invest in mining companies – whether from the former Soviet Union or elsewhere. Thanks to still strong commodity prices, the inclusion of natural resources firms in the index has helped propel it higher than it might otherwise have been.
More from Mindful Money:
To receive our free email newsletter sign up here.