As market commentators have rightly pointed out, the merged company will make up close to 10% of the FTSE 100. In simple terms, if the stock moves 10%, that’s a 1% move for an index tracker.
For stockpickers, an underweight position seems crucial – an upward market movement could conceivably push the holding beyond the 10% and therefore breaching diversification rules for open-ended collectives.
Trimming required
“At best you can hold market weighting, but of course market movement could conceivably push it up to 11% in which case you will continually be trimming it back,” comments Tim Cockerill, investment director at Rowan Dartington.
“If your benchmark is the FTSE 100 or All Share, then your position against that stock can determine your relative performance to a large extent. Is the risk of managers to be out of it too great?”
As it stands BG Group makes up around 1.8% of the FTSE 100, or 1.5% of the All Share, but fewer than 10% of the 270 funds in the IA UK All Companies sector had the stock in their top-ten holdings as at the end of February. While considerably more hold Shell, both being mega-caps means this is not going to skew weighting to the oil & gas sector as such.
Still, on a wider scale, this does not stop the ongoing problem of the sector’s huge position in the home indices.
“The oil sector in 2008 actually made the FTSE quite a defensive market, but over the past four or five years it has turned into a drag compared to the rest of Europe and North America,” argues Peter Sleep, senior portfolio manager at Seven Investment Management, who is currently equally weighting the FTSE 100 (1% in each stock) using a futures trade.
A number of so-called smart beta options are available to eliminate biases within markets, and it is clear their time may well have now come.
The ‘dividend aristocrats’ approach of looking at past dividend history is pitched against strategies such as the VT Maven Smart Dividend UK Fund, which looks to dividend forecasts. Elsewhere Tobam offers products based on its philosophy of maximising diversification by reducing biases, in the FTSE’s case oil & gas and banks, and up weighting under-represented sectors.
More M&A to come
Oil & gas in particular is problematic, and things could get more complicated with some viewing Shell’s acquisition as a harbinger of further consolidation within the sector following the 50% decline in the oil price since last July.
“The news comes on the back of other announcements, including Halliburton’s plans to buy Baker Hughes in the US and Repsol’s (Spain) proposed takeover of Talisman Energy (Canada),” says Michael Stanes, investment director at Heartwood Investment Management.
“The drivers of consolidation in the oil and gas sector are fairly obvious, as the industry adjusts to the lower oil price and creates cost efficiencies.”
Of course, M&A can also be a boon to investors that already hold the stocks, though it is clear that as economies and markets march forward the headaches have only just begun.
