Trusts at risk of All-Share exclusion

Several investment trusts face exclusion from the FTSE All-Share index under new liquidity rules, according to Wins Research. Of the 21 trusts “at risk”, Wins calculates that 12 may be ejected at the annual FTSE index review in December on the basis of recent trading volumes.

Exclusions would have serious implications for the future of the trusts. Index trackers that replicate the All-Share may be forced to sell holdings in trusts which drop out of the benchmark. Such redemptions would be significant – index trackers account for 6-7% of the British stockmarket.

Under previous rules, All-Share constituents had to trade 0.5% of their free float in eight of the 12 months to October 31.

However, for the year ending October 31, 2008, FTSE will require constituents to achieve a median daily trade per month of more than 0.025% in at least eight of the 12 months.

According to FTSE, this liquidity requirement is designed to filter out “lumpy” trading, where volumes are concentrated in a few trading days. In a statement last week, FTSE warned that it would take a tough line on all stocks. “The FTSE All-Share index is designed to reflect the performance of the UK stockmarket, not better performing shares,” it said.

FTSE indicated that it might be willing to adjust the threshold by 0.01%, depending on the outcome of the review. Even so, Wins says 12 trusts remain at risk (see table). Trusts could face being de-listed or moved to the Alternative Investment Market.

The Association of Investment Companies (AIC) and iPeit, the private equity investment trusts’ body, say they are consulting their members. Simon Elliott, head of research at Wins, says FTSE is likely to invoke the 0.01% reduction.