Tracker funds pile into Vodafone Airtouch

VODAFONE AIRTOUCH, the world's largest mobile phone operator, and officially Britain's second largest company after oil giant BP-Amoco, today makes its stock market debut.

But the historic completion of the pounds 38bn merger is leaving fund managers, especially the new breed of stock market index trackers, with a billion pound dilemma.

It stems from the relatively mechanistic way index-tracking funds buy stock in relation to its proportion of an overall stock market index. In the case of the FTSE 100, Vodafone Airtouch from today will account for about 5.8 per cent of the index's total value, up from 3.05 per cent. On the other side of the Atlantic, Airtouch's disappearance from such indexes as the S&P 500 is also having an impact as US investors sell stock to re-invest in American listed issues.

The upshot of these market dislocations has been extremely heavy trading volumes in Vodafone shares. Yesterday, for example, nearly 182 million shares in the mobile operator changed hands, accounting for almost one share in each six traded on the stock exchange.

Index-tracking strategists, while holding their cards close to their chests, admitted that heavy dealing in Vodafone was likely to continue for some time. "The action for this has been going on for a few weeks and will be going on for a few weeks," said Alistair Harding-Smith, an index-tracking strategist at Barclays Global Investment, commenting on Vodafone share dealing. "We watch it very closely each time there's an index change."

Although Vodafone lost 21p to close at 1269p, one trading director blamed the FTSE 100's 1.6 per cent fall on fund managers dumping other holdings in an attempt to partially redress underweight positions in Vodafone. "There are suspicions that some people have been unloading their weightings in the market and shifting into Vodafone," he said.

For non-index tracking fund managers like Schroder Investment Management - Vodafone's biggest shareholder - whether to buy more shares is a question of evaluating the stock's future potential.

"Everyone will be `underweight', all more than us," said Bill Baker, co-head of Schroder's UK Equity team. "Do we double our weighting when Vodafone stock has gone up fivehold? The first rule of fund management is whether it's good to buy the stock at these levels. Trackers will act differently."