Smaller companies are neglected in a market that adores the top 100 firms

Doff your cap and be prepared to shed a tear. Hanson looks set to be eased out of the FTSE Index of the Top 100 companies in the UK. While some may think this to be a reflection of the fact that the good Lord Hanson has had his day, the issues are somewhat more complex.

Anyway, far be it from me to suggest that one of the UK's most famous and successful corporate raiders has passed his sell-by date.

If it happens it will be a result of pressures from both without and within. First of all, Hanson has been busily divesting itself of the interests built up through two decades of aggressive acquisitive management.

The departure of Imperial Tobacco from the group has finally brought the market capitalisation to a point where Hanson only just justifies inclusion in the index. Then you have the new Young Turks of the stock market - those newly de-mutualised financial companies that are knocking on the door of the Footsie.

Both Woolwich and Norwich Union will enter the index when it is rebased in September. With market capitalisations of more than two and three times that of Hanson respectively, such a move is inevitable.

These changes emphasise the predominance of financial stocks within this index and serve to remind us that the Footsie is an index made up of successful companies.

Anticipation of entrants and departing companies is something of a City pastime. If, as a company, you look like gaining admission to the index, buyers emerge. Appear close to falling out and you will be friendless in the investment community. All rather sad really, particularly as Britain's smaller companies could do with a bit of support.

Support was not forthcoming in a recent report by one of the country's leading investment banks, suggesting Britain's second 250 companies were net losers in the changes resulting from the Budget measures on the tax treatment of dividends for pension funds.

According to HSBC Investment Bank, the shares of Britain's second-tier companies could fall out of favour with investors.

They reason that pension fund managers will be looking increasingly at dividend cover, the number of times dividends are covered by earnings, in an effort to invest in those companies best able to replace the loss of tax credit, by upping their annual payments.

It seems that, on balance, dividend cover for these particular companies is rather less than that enjoyed by Britain's top shares.

For those who missed this particular measure in Gordon Brown's first Budget, the ability of pension funds to reclaim the Advance Corporate Tax on UK dividends has been ended.

For UK investors, ACT, which is presently 20 per cent, is offsettable against the overall tax bill. A 40 per cent taxpayer thus has only a further 20 per cent to pay on any dividend received from a company.

Until the Budget, pension funds could reclaim this 20 per cent tax and thus increase the gross yield on investments. The ending of this practice has effectively cut the income return that pension funds receive on their assets by one-sixth.

The Chancellor was minded to introduce this measure in part to raise money for the Exchequer, but also to encourage companies to pay less out by way of dividend and reinvest more in their business.

HSBC surmises that this is unlikely to carry much weight with actuaries, who will be looking at the guaranteed return dividends can provide. These investors may be seeking to replace dividend income, perhaps by buying gilt edge stocks or investing in companies capable of upping their dividend regularly. Then there is the fact that these companies may need to replace the loss of revenue by raising the contribution to their pension funds.

This HSBC study showed that a number of companies had pension schemes likely to need a higher level of contribution, with all that means for profitability.

This added overhead comes at a time when many companies must be wondering if the consumer boom of recent months can continue for much longer.

I will not bore you with the arguments over the size of a pension fund in relation to the market capitalisation of the company involved, or the assumptions made in terms of growth of pension fund assets required to meet expected liabilities.

Suffice it to say that yet another cloud has passed across the horizon of those looking for a new dawn for smaller companies.

Global investors who chase the big companies are having it all their way, making indexed funds look evermore attractive. These funds have yet to be tested in a real bear market. Just remember markets do not go up forever.

Brian Tora is chairman of the Greig Middleton Investment Strategy Committee and may be contacted on 0171-655 4000.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Payday lender Cash Genie forced to repay £20m to ripped-off customers

The high-cost credit company preyed on vulnerable people struggling because of the recession

Mark Carney warns that the decision is likely to come into 'sharper relief' by 'the turn of the year'

An interest rate rise may be on the way - act now to secure a better mortgage deal

Competition has driven rates down but they could start drifting upwards

Santander 123 is attractive for those seeking interest on credit balances

Switching your current account? Pick one that reflects the way you run your finances

Andrew Hagger has carried out some research to try to establish which accounts are strongest in each of the different areas

A reader hit trouble after booking accommodation in a St Andrews hostel for the Open

Questions of Cash: 'Golfing break landed in the bunker when the price on the booking site was way below par'

One reader encountered a problem when booking accommodation at the St Andrews Tourist Hostel through HostelBookers

The Money Shop this week became the latest payday lender to have an ad banned

Payday lenders slammed for 'misleading' claims: charities say they're still not doing enough to help borrowers

Debt charities say there seems scant evidence to back up CFA's latest report

The crooks, like these in the 1955 film The Ladykillers, are waiting in the shadows as people cash in their savings

Savers are embracing their pension freedom ... and so are the scammers

There have been fresh warnings that scammers are trying to trick people into using liberated cash to invest in dodgy schemes

Don't get burnt: holidaymakers should check their plastic

How to avoid costly debit or credit card charges on overseas trips

Taking the wrong plastic can be a costly mistake, leaving you paying over the odds for your holiday spending money to the tune of £68, maybe more

From as far back as the Seventies, women have been drawn to the tables, attracted by the sense of feeling like a celebrity

Gambling is on the rise - so is enough being done to combat problem betting?

More and more of the 'AB' classes are joining the vulnerable in playing the odds, as Neasa MacErlean reports
No sunshine: Not all pensioners will be as happy as these women

Freedom reform leads to £1.8bn run on pension pots

But the right of over-55s to withdraw their retirement nest-eggs opens the door to scammers.

Mark Carney; '[there is] no immediate need to increase interest rates'

Interest rates: five things you need to know about a rise in rates by the end of the year

Mark Carney said the decision to raise interest rates was likely to come by 'the turn of the year'

Viagogo struck a discordant note when tickets for Ed Sheeran didn’t arrive

Viagogo withdraws tickets from sale the day before Ed Sheeran's concert, and the story repeats

Ticket frustration a go-go as gig-goers are let down again. Funny how bad publicity helps 

Just 39 per cent of 25-45 year-olds own a home in London, which has the lowest rates of young homeowners in the country (Getty)

Have you been given the wrong mortgage? City Watchdog says it is 'unclear' why two-fifths of loans were recommended

Stringent new rules were supposed to stamp out mortgage mis-selling, but only 59% of mortgage borrowers were given suitable advice

ATM access is to be investigated

The 'bank calls' suggesting to move the cash into the 'safe' account might steal your money

The alarm bells are ringing over 'no hang-up' fraud

Rip-off energy prices are here to stay, even though watchdog has slammed the Big Six

Big firms are skilled at increasing profits while millions struggle with fuel poverty

High costs on the high street: the largest players in British banking may not have enough incentive to be competitive

If a bank calls about transferring money because of fraud, you risk losing your life savings

A retired nurse lost £14,000 to unscrupulous rogues

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consulant

    £20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

    Guru Careers: Financial Controller

    £45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Recruitment Genius: Sales Adviser - OTE £24,500

    £22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

    Day In a Page

    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    Mullah Omar, creator of the Taliban, is dead... again

    I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
    Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

    Margaret Attwood on climate change

    The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
    New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

    New Dr Seuss manuscript discovered

    What Pet Should I Get? goes on sale this week
    Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

    The cartoon hedgehog leading the way into a whole new reality

    Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
    Ants have unique ability to switch between individual and collective action, says study

    Secrets of ants' teamwork revealed

    The insects have an almost unique ability to switch between individual and collective action
    Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

    Donovan marks his 50th year in folk

    The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
    Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

    Simulator recreates thrill of F1 circuit

    Rory Buckeridge gets behind the wheel and explains how it works
    Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

    Twitter accused of 'Facebookisation'

    Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
    Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

    Jane Birkin asks Hermès to rename bag

    The star was shocked by a Peta investigation into the exotic skins trade
    10 best waterproof mascaras

    Whatever the weather: 10 best waterproof mascaras

    We found lash-enhancing beauties that won’t budge no matter what you throw at them
    Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

    Diego Costa: I go to war. You come with me...

    Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
    Ashes 2015: England show the mettle to strike back hard in third Test

    England show the mettle to strike back hard in third Test

    The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
    Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

    Charley Hull: 'I know I'm a good golfer but I'm also just a person'

    British teen keeps her feet on ground ahead of Women's Open
    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
    Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

    Our choice is years of Tory rule under Corbyn or a return to a Labour government

    Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'