MARKET COMMENT
Surprise Entry To The FTSE 100

By David Kuo (TMFDragon)
June 13, 2002

At the close of business yesterday, the FTSE Committee confirmed that ARM Holdings (LSE: ARM), Logica (LSE: LOG) and Electrocomponents (LSE: ECM) would be deleted from the FTSE 100 index. The committee said their position in the top-flight index will be replaced by Johnson Matthey (LSE: JMAT), Bunzl (LSE: BNZL) and the little-known Xstrata (LSE: XTA). The changes will be applied at the close of business on Friday 21 June and takes effect when the market opens on Monday 24 June.

Xstrata was floated on the London Stock Exchange on 25 March this year. The floatation of the Switzerland-based mining company is the largest initial offering in London so far this year. The placing was some seven times over subscribed and the company is currently valued at about £2.5b. It is 40% owned by Glencore International, a diversified international mining group. Xstrata has interests in coalmines in Australia and South Africa and also operates a zinc mine and smelter in Spain.

There were some significant changes made to the FTSE 250 index too. Most notable were the departures of Psion (LSE: PON), Marconi (LSE: MONI) and Telewest (LSE: TWT). Also leaving the midcaps will be London Bridge Software (LSE: LNB), Medisys (LSE: MDY), TTP Communications (LSE: TTC), Filtronic (LSE: FTC) and Charter Pan-European Trust (LSE: CPE).

Moving up from the FTSE SmallCap index to replace these companies include Enodis (LSE: ENO), Ultra Electronics (LSE: UTF), Hiscox (LSE: HSX), Quintain Estates (LSE: QED) and Rathbone Brothers (LSE: RAT).

The latest reshuffle reflects just how badly the technology companies have fared over the past three months. Marconi was once a high flier in the FTSE 100 and at that time the shares were changing hands at over 1200p apiece. Today the shares are worth just a fraction of that and the company is valued at just £200m. Psion has also had a humbling experience. At its peak the shares were worth almost £15 each but have since slumped to just 53p.

Investors should remember that changes to the make up of the indices ensure that those index numbers remain an accurate reflection of market activity. They make very little difference to the actual business performance of the companies. Just think about it. You are unlikely to use any more platinum on the 24th of June when Johnson Matthey joins the FTSE 100 than today when the company is just a midcap metal refiner. It is also worth bearing in mind that companies shuffle in and out of the various indices every three months.

Some investors might be a little worried that the share price of a company might fall when it is no longer included in one of the major indices. This line of thinking is often provoked by concerns that fund managers will have to adjust their portfolios when changes to the index constituents are made. However, there is little evidence to support this theory. In fact, the cost of dealing may outweigh any benefits from trying to pre-empt a share price movement before the changes take place at the end of this week. So the best advice is not to even try and instead focus your efforts on deciding whether you believe the shares in the company are undervalued or overvalued.