Euromergers Shrinking Euro Indexes - For Now

April 01, 1999

European investors want more from their market-index providers, but some fear they are getting less.

As companies merge, the number of stocks in broader European indexes is shrinking significantly and fund managers say that is hurting their efforts to diversify. But index providers claim it's too soon to lengthen their lists, even though "It's possible the broad indexes will soon become the blue-chip indexes," as Scott Stark has quipped. He is Stoxx Ltd.'s regional director for the U.K. and Ireland.

Indeed, the Stoxx indexes, like some others, seemed to be shrinking at an alarming rate. The Dow Jones Stoxx index contained 665 stocks in February 1998, but by June 1999, that number had been pared down to just 594, a rate that would bring it to zero in less than a dozen years. The Dow Jones Euro Stoxx index, which covers the European Monetary Union, fell from 326 companies to 295.

Some investors worried about the narrower stock universe after Zurich-based Stoxx unveiled changes to its blue-chip indexes in June that would base the selection of stocks on Europe as a region rather than on a country by country basis. They feared Europe's lesser countries would be neglected.

However, Stoxx also announced, on September 9, that it would be fixing the number of companies included in the broad index at 600 (a company can have multiple issues included in the index; so currently there are 617 issues). These changes will prevent further shrinkage of the index, though it is still noticeably less than 665.

In addition, Stoxx has subdivided the broad index: the top 200 stocks compose the Large index; the middle 200 the Mid index; both together the Large & Mid index, and the bottom 200 compose the Small index. Similar indexes will be launched for the Eurozone, Europe ex UK, and 19 market sector indexes, not to mention Europe ex Euro and Nordic regional indexes.

The changes, while they help alleviate such investor concerns, were not inspired by them, said Michael Schanz, director of Stoxx Ltd. "At (the time of the June announcement), this (change to the broad index) was under discussion. It was more a question of if and when.

"It's now a size index, where we're just taking the 600 biggest companies. Before we were taking 80% market cap per sector. When you have a percentage target, the number can vary." He added that fixing the number of companies at 600 increased the index's representation of the market to 87%.

Schanz believes the changes alleviate more urgent concerns.

"There's certainly a need in Europe, and I guess in the U.S. as well, for a mid and small cap. There's really no question; we've heard a lot of people asking for that. The second thing that we've heard a lot of people asking for is the tradable sectors." Schanz explained that these tradable sectors include only stocks from the top 400 stocks of the benchmark, making the sectors smaller and more liquid.

"Markets are integrating and this is what investors want from us."

Schantz continued, "(The index has) got to be representative. If we have 87% market cap covered, we feel that that's a pretty good level. It will happen that small companies in small countries may drop off, but small companies in large companies may drop off as well."

Some investors are asking for a European all-share index, as a way of circumventing these issues of small-or fringe-country representation, giving less attention to markets like Portugal, Greece, Ireland and Eastern Europe. Future fringe-market titan stocks could include Telekomunikacja Polska SA of Poland, Budapest drug maker Gedeon Richter, or a number of merged banks in the Czech Republic. These companies already receive considerable attention in their home markets from foreign investors.

AEuropean all-share index may not be too far away. Mark Makepeace, managing director at index provider FTSE International, said such an index may be "three or four years off. Asmall number of our investors have already been asking for such an index." He has some sympathy for those who complain about the shrinking number of index components, since the FT/S&P Europe Index, with about 700 stocks, had 750 stocks in January. But even there, such an index is not imminent. "Small-stocks coverage is next. (And) right now, investors want mid-cap stocks coverage."


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