Blue-chip old guard face FT-SE relegation zone

The September reshuffle of the FT-SE 100 will involve the usual swapping of stragglers for high-flyers. But radical changes to the way the index is calculated could result in the surprise relegation of veteran members such as Rolls-Royce and British American Tobacco.

The September reshuffle of the FT-SE 100 will involve the usual swapping of stragglers for high-flyers. But radical changes to the way the index is calculated could result in the surprise relegation of veteran members such as Rolls-Royce and British American Tobacco.

As markets and investors adopt an increasingly pan-European view in their portfolios, the authorities at both the FT-SE International and the Dow Jones have realised changes must be made. Both compilers have decided that comparisons between UK and Continental stocks can only be fair if the relative proportion of free-floated shares is factored in.

The move is aimed at giving pan-European investors a clearer picture of the lie of the land on the Continent, where some of the largest companies offer the market only a very small percentage of their total stock. But a number of older UK groups are also sitting on large quantities of "unavailable" shares, and could end up de-rated as a result. Companies with hefty family or state holdings such as Rolls-Royce, BAT or even British Aerospace could find their following by active investors and tracker funds drastically cut, swiftly eroding their premiership status.

The first effect of the changes will be on the index weightings of individual members. At the moment, the FT-SE 100, 250 and European indices involve a straight reckoning of market capitalisation: since Vodafone AirTouch is the biggest company, it also has the highest weighting. But those levels will be re-worked to reflect the exact amount of stock available to investors.

FT-SE calculations will be based on a system of bands. For the lowest, weightings could be cut to a quarter of their original value. BMW, for example, as one of Germany's biggest companies wields 2.6 per cent influence over the DAX index, but a considerable chunk of the group's shares are owned by the Quandt family. As a member of the new-look Eurotop 300 index, its clout would be significantly reduced.

The changes will indirectly generate billions of pounds of changes in market capitalisations as index-linked tracker funds, which hold about 20 per cent of the UK market, factor in the re-weightings.

According to analysts at Schroder Salomon Smith Barney, companies such as Energis, Anglo American and Sema all stand to lose hundreds of millions from their value, as the trackers switch to stocks with bigger free floats. At the top of the list is BSkyB, whose share price was once boosted by the short supply of its shares, and who could find £1.1bn of stock sold by the funds.

Although the free-float adjustments will hurt some of the UK's biggest stocks, the overall effect for the UK market is likely to be positive. Companies on the Continent have greater proportions of their stock tied up in cross-holdings or family interests. Even some new economy groups, such as Wanadoo, operate with a similarly closed structure. The theory is that pan-European tracker funds, which buy all the stocks in a big index like Eurotop 100 and then adjust to the weightings, will find more of their investment landing in the UK, where there is a generally higher availability of free float.

FT-SE plans to apply the rule to any company listing from now on, and to all companies by June next year.

But, as one analyst points out: "It's always the same with this sort of thing - as soon as investors cotton on to what's going to happen, they'll make their changes now. Bad news for some old faces."