Oh Man, We're Out Of The FTSE 100!

Published in Investing on 7 June 2012

Hedge-fund manager Man gets relegated from the blue-chip index, but could bounce back.

Today is a sad day for the directors and owners of listed hedge-fund manager Man Group (LSE: EMG), because it was expelled from the blue-chip FTSE 100 index of elite British companies.

Demoted to the FTSE 250

Four times a year, the FTSE indices are reshuffled, with companies moving into and out of the FTSE 100, FTSE 250 and FTSE All-Share indices, based on whether their market values have risen or fallen.

The biggest winners are those that join Britain's corporate heavyweights by climbing into the FTSE 100. As well as being akin to being promoted to football's Premier League, promotion also means that FTSE 100 tracker funds must buy into the promoted firms, which can help push up their share prices.

Unfortunately, Man's crashing share price has seen it ejected from the Footsie, to be replaced by defence contractor Babcock International (LSE: BAB), which moves up from the mid-cap FTSE 250 index. Even more embarrassingly, Man was the only casualty of the latest FTSE 100 reshuffle, so it's red faces all round at its head office in the City of London.

Ups and downs

In order to keep the FTSE indices relatively stable, mid-cap companies are automatically promoted to the FTSE 100 at the quarterly index reviews only if their market values rank them inside the top 90 places. Likewise, firms are demoted from the blue-chip index when ranked below 110th (or when they have the lowest FTSE 100 market value) when FTSE 250 firms are automatically promoted.

According to Thomson Reuters data, Man was in 156th place in the FTSE rankings, while Babcock was 83rd, so they will swap places in the FTSE 100 index on Monday, 18 June.

Since the previous index review in March, Man's shares have almost halved. At 81.2p per share, Man's market value is below £1.5 billion, which just isn't enough to keep it in London's top 100.

Man and markets

Right now, Man's biggest problem is that its profits are being hammered by volatile and falling markets.

Man's trend-following, futures-driven strategies -- such as those employed by its flagship AHL fund -- seem to do best in stable or rising markets. Alas, with the FTSE 100 down nearly 6% in the past three months, Man is moving further and further away from the high-water marks its funds need to exceed to start earning juicy performance fees once more.

What's more, in response to eurozone turmoil, Man's clients have been withdrawing money from its various funds. Thus, this 'double whammy' of fund withdrawals and poor returns could well blow a big hole in Man's next set of profits.

The comeback Man

Even so, I have a sneaking suspicion that Man will return to the FTSE 100 and enjoy more days in the sun. All it needs is a couple of good quarters and its shares could surge, propelling its market value past the £2 billion mark once again.

Right now, Man shares trade on a modest forward price-earnings ratio below 11, and offer a whopping prospective dividend yield of 18.3%, but covered a mere 0.5 times. Despite having net cash of $250 million (£162 million), I can't imagine that Man will pay such a large, uncovered dividend.

Nevertheless, even if Man halves its dividend to preserve cash, it would still offer a dividend yield above 9%. Hence, I am patiently watching Man, waiting to 'pull the trigger' and buy when my desire for its delicious dividend outweighs my fear of yet more falls in financial markets!

Talking of the FTSE 100, do you know which FTSE firm investment genius Warren Buffett -- the world's third-richest man, with a $44 billion fortune -- has been buying into this year? Simply download your free copy of our latest report, The British Business That Warren Buffett Loves, to find out which UK giant the 'Oracle of Omaha' is betting on!

More from Cliff D'Arcy:

Disclosure: Cliff does not own shares in any share mentioned above.

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Comments

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longpod 08 Jun 2012 , 7:22pm

Since Babcock is worth more than Man, does that mean that the FTSE100 will get an automatic boost on Monday 18th when the changes take place, or is the overall valuation/weighting somewhat more subtle than that?

Gengulphus 09 Jun 2012 , 3:42pm

In order to keep the FTSE indices relatively stable, mid-cap companies are automatically promoted to the FTSE 100 at the quarterly index reviews only if their market values rank them inside the top 90 places. Likewise, firms are demoted from the blue-chip index when ranked below 110th (or when they have the lowest FTSE 100 market value) when FTSE 250 firms are automatically promoted.

I don't think that "(or when they have the lowest FTSE 100 market value)" is going to make much sense to anyone unless they already know the rules and so don't actually need them explained!

To explain it better to those who don't already know, the promotions and demotions are worked out in two stages:

1) Non-FTSE100 companies that rank 90th or better by market value are promoted to the FTSE100, and FTSE100 companies that rank 111th or worse by market value are demoted out of it.

2) It's possible that stage 1 will have demoted more companies than it promoted, so that the FTSE100 is left with fewer than 100 companies; if that happens, the total is restored to 100 by repeatedly promoting the highest-ranking non-FTSE100 company by market value until there are again 100 companies in the FTSE100. And similarly, it's possible that stage 1 will have demoted fewer companies than it promoted, so that the FTSE100 is left with more than 100 companies; if that happens, the total is restored to 100 by repeatedly demoting the lowest-ranking FTSE100 company by market value until there are again 100 companies in the FTSE100.

If stage 1 promotes and demotes equal numbers of companies, as on this occasion, stage 2 doesn't do anything.

Gengulphus

Gengulphus 09 Jun 2012 , 4:17pm

longpod,

Since Babcock is worth more than Man, does that mean that the FTSE100 will get an automatic boost on Monday 18th when the changes take place, or is the overall valuation/weighting somewhat more subtle than that?

The latter - there's an overall "index divisor" that is adjusted on constituent changes and on various other events to ensure that the index value remains unchanged by them. If you're interested in the details, http://www.ftse.com/Indices/UK_Indices/Downloads/FTSE_UK_Index_Series_Guide_to_Calculation.pdf is reasonably readable - its sections 3 and 6 are the main relevant parts to your question..

Gengulphus

longpod 10 Jun 2012 , 5:13pm

Thanks for that Gengulphus

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