Fund managers and private individuals are to be offered a new way to follow the UK stock market, with the creation of an innovative index that its designers believe is guaranteed to beat the FTSE 100.
FTSE is planning to launch a new index whose members are weighted not by their market values - as in the current FTSE 100 - but by their fundamental merits. More weight will be given to companies with the highest sales, strongest cashflows, highest asset values and most generous dividends. Investors could be able to buy shares in a tracker fund of the new index as soon as it is launched around the end of this year.
FTSE has a similar project at a more advanced stage in the US, and yesterday it launched 10 new so-called "fundamental indices". Ten associated tracker funds also began trading on Nasdaq yesterday.
Interest in fundamental indices has been growing in financial circles over the past two years, and fund managers have committed some $4bn (£2.12bn) to track these indices. FTSE was the first of the major index providers to move into this burgeoning area last year. It hopes to earn significant new income from licensing its indices to fund managers who want to create tracker funds.
Jeff Moskowitz, president of FTSE Americas, said indices which give more weight to companies with bigger market capitalisations tend to underperform. "They overweight the highest-priced stocks, underweight the lowest-priced. For instance, during the dot.com boom, as tech stocks grew, those market cap-weighted indices reflected that. But from an investor point of view, it didn't make sense to ride that all the way to the top."
FTSE's fundamental indices will bar companies without a five-year sales record, and those with few assets or weak cashflows will make little impact on the index. "We are hoping to see fundamental indices take off in the UK, too, and we are getting interest there," Mr Moskowitz said. "We are talking to several providers about creating an exchange-traded fund, and we should have a UK deal done by the end of the year."
The 10 exchange-traded funds launched on Nasdaq yesterday will be managed by PowerShares Capital Management of Illinois. The fundamental indices they track, which measure several US industry sectors, will be reweighted by FTSE twice a year to reflect changes in the sales, assets, dividends and cashflows of the member companies.