View from City Road: Small companies come clear

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The Independent Online
INDICES don't die, they just fade away. Even the FT 30-share index, launched in 1935, is still around, its survival more dependent on sentiment than on necessity.

It fell from favour after the launch of the FT-SE 100 in 1984. This index now looks set to lose out to the FT-SE 350 after it is launched next week. The new index will measure 92 per cent of the stock market by value and volume, whereas the FT-SE 100 measures just 72 per cent by value and 68 per cent by volume.

The FT-SE 350, being larger, will be less vulnerable to changes in its composition. When companies are ousted because they have fallen below the value, volume and liquidity thresholds, their replacement will hardly affect the index. Changes in its sector exposure will be more gradual than they have been in the FT-SE 100.

These have been particularly apparent in the recession as construction and financial companies such as Trafalgar House and Royal Insurance have fallen below the pounds 1bn threshold to be replaced by utilities and other new entrants. As a result the gas, telephone, electricity and water companies are far more dominant in the FT-SE 100 than in the market (or economy) as a whole.

Just as the FT 30 relies on history - its low point was two weeks after the end of Dunkirk - the FT-SE 100 may win support for its role in measuring the crash. Familiarity will be a big factor in its preservation, especially among dealers.

But fund managers, already used to using sub-indices of their own devising, will find the new benchmarks useful. The size effect is clear from running the new indices as if they had started in 1985. This clearly shows how the medium-sized companies - to be covered by the FT-SE 250 - outperformed for three years from 1985 only to lag behind the rest of the market from 1989 to 1991. They outperformed by 5 per cent in the first half of this year.

Smaller companies have something to gain from the planned extension of the FT- Actuaries All-Share to 850 companies, which will bring another 250 into the indexed fund managers' net. But that still leaves another 800 companies, accounting for just 2 per cent of the market's value, outside any index. There is little help at hand for them.