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  • FIRST POST
    • aroominyork
    • By aroominyork 6th Mar 18, 9:17 PM
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    aroominyork
    Investment trusts in FTSE indexes
    • #1
    • 6th Mar 18, 9:17 PM
    Investment trusts in FTSE indexes 6th Mar 18 at 9:17 PM
    Do people think it an anomaly that investment trusts such as SMT and Monks figure in the FTSE100/250 etc.? All kudos to them for their wily stock-picking, but they are just a collection of global shares and their presence in the FTSE does not reflect the businesses which make up the nuts and bolts of the British economy, which surely is what the indexes should be. Also, if you buy a FTSE index fund does it include the ITs and hence mean you double-buy companies which the ITs hold?
Page 1
    • A_T
    • By A_T 6th Mar 18, 9:20 PM
    • 442 Posts
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    A_T
    • #2
    • 6th Mar 18, 9:20 PM
    • #2
    • 6th Mar 18, 9:20 PM
    But they are part of "the businesses which make up the nuts and bolts of the British economy". That's why they're in the index.
    • A_T
    • By A_T 6th Mar 18, 9:26 PM
    • 442 Posts
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    A_T
    • #3
    • 6th Mar 18, 9:26 PM
    • #3
    • 6th Mar 18, 9:26 PM
    Legal & General UK MID Cap Index Fund tracks the FTSE 250 ex. Investment Trusts Index. Not sure if there are any other ex. Investment Trusts Index trackers.
    • aroominyork
    • By aroominyork 6th Mar 18, 9:41 PM
    • 481 Posts
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    aroominyork
    • #4
    • 6th Mar 18, 9:41 PM
    • #4
    • 6th Mar 18, 9:41 PM
    But they are part of "the businesses which make up the nuts and bolts of the British economy". That's why they're in the index.
    Originally posted by A_T
    They manufacture nothing. An individual IT provides no meaningful service. They employ a handful of people. They are an irrelevance to the fundamentals of the British economy - let alone that they mostly hold shares in businesses from other economies. They are only in the FTSE because they happen to be closed ended rather than open ended; if every OEIC which held over £4bn of shares was in the index there would be little space for genuine manufacturing and service companies.
    • dividendhero
    • By dividendhero 6th Mar 18, 10:10 PM
    • 208 Posts
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    dividendhero
    • #5
    • 6th Mar 18, 10:10 PM
    • #5
    • 6th Mar 18, 10:10 PM
    But they are part of "the businesses which make up the nuts and bolts of the British economy". That's why they're in the index.
    Originally posted by A_T
    FTSE100 is companies listed in Britain, there are companies in the index which don't do any business in the country - eg the Silver miner Fresnillo is a FTSE100 company that doesn't have any operations here.

    Will be interesting if Aramco from Saudi Arabia gets a UK listing. It'll be biggest company in FTSE 100 and have no operations here
    • george4064
    • By george4064 6th Mar 18, 10:12 PM
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    george4064
    • #6
    • 6th Mar 18, 10:12 PM
    • #6
    • 6th Mar 18, 10:12 PM
    There are indices that exclude Investment Trusts and Investment companies.

    Example here: https://www.premierfunds.co.uk/media/5124/acorn-income-fund-monthly-factsheet.pdf

    'Numis Smaller Companies (ex. IC) Index'
    "If you arenít willing to own a stock for ten years, donít even think about owning it for ten minutesĒ Warren Buffett

    Save £12k in 2016 - #045 £10,358.81/£12,000 (86%)
    Save £12k in 2017 - #003 £12,427.51/£12,000 (104%)
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    • aroominyork
    • By aroominyork 6th Mar 18, 10:45 PM
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    aroominyork
    • #7
    • 6th Mar 18, 10:45 PM
    • #7
    • 6th Mar 18, 10:45 PM
    FTSE100 is companies listed in Britain, there are companies in the index which don't do any business in the country - eg the Silver miner Fresnillo is a FTSE100 company that doesn't have any operations here.
    Originally posted by dividendhero
    Fair point.
    • Tom99
    • By Tom99 7th Mar 18, 1:59 AM
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    Tom99
    • #8
    • 7th Mar 18, 1:59 AM
    • #8
    • 7th Mar 18, 1:59 AM
    You are right, they do distort the index a bit as you are doubling up on any companies the IT own which are already in that index or adding companies which are outside that index into the index.

    So if BP has a market cap of £x and your FTSE100 IT owns shares in BP worth £y then the FTSE100 index is weighted as if BP was worth £x + £y and not just £x.

    And any FTSE100 tracker fund will invest in BP and the IT so will have the correct index weighting in BP of £x + £y not just the 6% or whatever the BP is supposed to represent in the index.

    I expect the effect is very small though.
    Last edited by Tom99; 07-03-2018 at 2:59 AM.
    • grey gym sock
    • By grey gym sock 7th Mar 18, 5:15 AM
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    grey gym sock
    • #9
    • 7th Mar 18, 5:15 AM
    • #9
    • 7th Mar 18, 5:15 AM
    it won't be a significant effect for the FTSE 100 index. i think there are only 2 ITs in the FTSE 100 (3i and scottish mortgage), and they are relatively small (as FTSE 100 shares go), so they are only going to come to a fraction of 1% of the value of the index between them.

    it's more significant for the FTSE 250, which includes something like 40 ITs. though again, they are not the biggest companies in the FTSE 250. it looks like ITs might account for c. 13% of the FTSE 250 (by comparing the sizes of the top 10 holdings for that L&G UK mid cap tracker, which excludes ITs, to the HSBC FTSE 250 tracker, which includes them; incidentally, none of the shares in those top 10s are ITs).

    a few IT are not mostly invested in quoted shares at all, so you aren't doubling up with them. one example is 3i.
    • AnotherJoe
    • By AnotherJoe 7th Mar 18, 9:17 AM
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    AnotherJoe
    I can see your point OP it's very incestuous / self referential. Such an IT might also hold shares in itself as well, ending with the index including a company that holds shares within the index, plus shares in itself which are thus shares within the index, and maybe shares in other ITs which themselves etc..
    • redux
    • By redux 7th Mar 18, 9:26 AM
    • 18,224 Posts
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    redux
    I can't see the problem. There are versions with and without investment trusts. It sounds more like a complaint about index trackers and maybe ETFs. If you don't want to buy a tracker that includes investment trusts, then look at another.
    Last edited by redux; 07-03-2018 at 10:04 AM.
    • aroominyork
    • By aroominyork 7th Mar 18, 2:41 PM
    • 481 Posts
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    aroominyork
    It's not a complaint, I don't buy FTSE trackers. It's the anomaly issue, of ITs forming part of the indexes whereas they are just a collection of shares in other companies and the open ended equivalents are not there. Over and (unless it gets interesting) out.
    • k12479
    • By k12479 7th Mar 18, 3:40 PM
    • 399 Posts
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    k12479
    It's the anomaly issue, of ITs forming part of the indexes whereas they are just a collection of shares in other companies...
    Originally posted by aroominyork
    But ITs are companies still and the same argument also holds true for other constituents - the likes of say Anglo American or Shell are a collection of global holdings in various wholly-owned subsidiaries, majority and minority stakes and joint ventures.
    • grey gym sock
    • By grey gym sock 7th Mar 18, 4:05 PM
    • 4,388 Posts
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    grey gym sock
    i agree it's an anomaly.

    i disagree that ITs are "just a collection of shares in other companies". that is a fair description of many ETFs. but even when an IT holds nothing but shares in other companies, it is not just a collection, because it may trade at a significant discount or premium to the net asset value of those shares. and then, an IT may also use gearing (or hold cash). and may also hold unlisted investments. but you do get an investment with different characteristics, just by putting some quoted shares inside a closed-ended quoted company.

    i suppose one could argue that indexes should fully include ITs, to capture the different investment characteristics you get by holding (e.g.) BP inside an IT, but should scale down their weighting of BP itself in indexes, to exclude shares in BP held by other quoted companies (including ITs). so e.g. if 1% of BP shares are held by ITs, one could base BP's weight in indexes on 99% of its market capitalization, not 100% .

    i don't think any indexes do this now. though they do something comparable: they scale back shares' weightings based on the free market float, i.e. excluding any very large individual shareholdings.
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