Out with textiles and in with IT in FTSE's end-of-year review
Monday 05 January 1998
Footsie International, the organisation behind the range of market indices, has been preparing for the IT debut for some time. Companies involved are consulted; their views taken on board.
The creation of an index is an important development for shareholders. It could lead to re-ratings.
Many of the IT groups have enjoyed a remarkably cheerful run since it became apparent they would form a stand alone sector. Before their "independence" most were lumped in with support services companies.
Among those to benefit from the signalled IT sector and push ahead in the past month are Lynx and Sherwood International. The suspicion the new index will have a beneficial influence lifted Lynx, which started life as a company developing hotel safes, from 99p to 128.5p; Sherwood had an even more impressive run, going from 365p to 572.5p.
Stockbroker Granville Davies believe the IT performance of fund managers will be measured against the new index. "This may well nudge prices even higher as those which are underweight attempt to achieve a full weighting."
The IT sector embraces 88 companies including five MidCaps and 24 AIM stocks. The largest constituents are Misys, capitalised at approaching pounds 2.1bn, and Sema at pounds 1.7bn.
Composition of the sector is already arousing comment. There seems to be a move to include more IT recruitment companies. As Granville Davies point out 74 per cent of CRT's turnover comes from IT services yet it is in the Education, Business and Training sector. Among others excluded are SBC Group, which collects all its revenue from the provision of IT staff, Highams Systems Services (90 per cent) and Harvey Nash (75 per cent). The stockbroker suggest those which feel they have been overlooked will be pressing for inclusion.
The index changes were not confined to the creation of the IT sector. It was also decided to end the existence of the textile and apparel sector, merging it with household products.
Big sector changes are made at the start of the year. For many years there were no substantial changes, just the occasional gentle tinkering. But what appeared to be a realistic division in the 1970's looked out of place in the much more classification conscious 1990's. So five years ago there was an overhaul which led to the removal of some rather bewhiskered, rather quaint sectors, such as Drapery and Stores.
The drinks industry is one area which has felt the reforming zeal of the index men. Until the government's Beer Orders quoted pub companies were conspicuous by their absence. The late Maxwell Joseph had swallowed the last quoted independents in the 1960's when his Grand Metropolitan empire took over Levy & Franks and Shorts. In those days pub portfolios were seen as essential adjuncts to a brewery.
But the Beer Orders forced the big brewers to unload vast chunks of their once cherished estates. And, as the Bass sale of its 1,400 remaining tenanted pubs demonstrates, the ownership of as many pubs as possible is no longer regarded as an essential part of the big brewers strategy.
The upheaval among the beerage led to the creation of a host of pub-owning companies. Many were backed by venture capitalists. They are not the most patient of souls and were not slow to press for a stock market presence so they could realise at least part of their investment.
With quoted restaurant chains, another phenomenon of the 1990's, it was felt there was a need to end the existence of the old Distilleries and Breweries sector which seemed an ill-fitting classification for pub chains as well as GrandMet, which by then had sold its breweries, and the likes of cider maker HP Bulmer.
Two new sectors were created - Breweries, Pubs and Restaurants and Alcoholic Beverages. There were some complaints and the sight of Harry Ramsden fish and chip shops rubbing shoulders with Scottish & Newcastle, the nation's largest brewer, caused some astonishment.
The split was possibly more beneficial to the breweries sector, which enjoys a higher rating than the alcohol segment.
A certain amount of bedding down follows an index reshuffle and FTSE International expect there may be some minor IT and textile adjustments.
"Any company which feels it has been misplaced should contact us and put forward its case which we will discuss with them," said a spokesman.
There had been expectations the drug sector would be changed with the fledgling element, the biotechs, stripped out. But FTSE International decided against any move. "It was felt biotechs are merely drug companies at an early stage of their development and should remain with the giants," said the spokesman.
A sector of the future could be football clubs. Fifteen are now on the market. More are expected. Perhaps they will get their own pitch at the next review.
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