Investing in the stock market is a never-ending challenge. Just when you think you have it all worked out, a new issue arises to keep you on your toes.
Today we have big news that investor favourite Unilever (LSE: ULVR) could be set to leave the FTSE 100 index in the near future.
So what does this mean for investors and what are the implications for your portfolio?
FTSE 100 exit
At a conference hosted by Deutsche Bank in Paris today, Unilever chief financial officer Graeme Pitkethly told investors that, after choosing to move its headquarters to Rotterdam, it was “extremely unlikely” that Unilever would stay in the FTSE UK series. The company plans to keep its shares listed on the London Stock Exchange, but the stock will no longer be part of indexes such as the FTSE 100 or the FTSE All Share.
Investors clearly aren’t happy, with the shares falling around 4% today.
There are several things you need to know about this news. First, the good bit is that the company has said it plans to stay listed on the London Stock Exchange. That means you won’t have to sell your Unilever shares. UK investors will be able to continue to invest in one of the most dependable long-term stocks on the market.
Yet I think there’s a chance we could continue to see further share price weakness in the near term. You see, many institutional funds are ‘benchmarked’ to indexes such as the FTSE All Share. This means that portfolio performance is judged in relation to the performance of the index. For this reason, many portfolio managers often construct their portfolios with similar stock weightings to the index they are benchmarked against. For example, if a stock has a large weighting in the FTSE All Share, a portfolio manager may have a large weighting to that stock in his portfolio. Unilever does have a large weighting in several key indexes, and as a result, many portfolio managers have large weightings to Unilever within their portfolios.
With Unilever set to possibly leave the FTSE 100 and the FTSE All Share, institutional fund managers will be wondering what to do right now. While some will probably choose to remain invested in the business because of its high-quality attributes, others may decide to sell some or all of their holdings and rejig their portfolios to better match their benchmarks. A high degree of selling could result in further share price weakness.
However, the important thing to realise is that leaving the FTSE 100 won’t have any effect on the company’s operating performance. Unilever will continue to sell its products such as Dove soap, Ben & Jerry’s ice cream and Persil detergent all over the world, and it’s likely the company will keep rewarding its shareholders with regular dividends. So today’s news is no reason to panic.
Having said that, now probably is a good time to check that your portfolio is diversified and not overexposed to Unilever, just in case the shares do fall further.
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Edward Sheldon owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.