As Fund Strategy reported (October 6), FTSE will introduce tighter liquidity requirements for its UK Index Series during the next annual review, this month. Liquidity calculations will switch from a mean to a median basis. At present, All-Share constituents must trade 0.5% of their free float in eight of the 12 months to October 31. In a bid to filter out “lumpy” trading, FTSE announced new rules requiring firms to achieve a median daily trade higher than 0.025% of their shares in issue in at least eight months.
Wins calculated that the change could trigger the relegation of over 20 investment trusts to the FTSE Fledgling index. The resulting forced selling from index trackers would have a severe negative impact on the share price of any excluded trusts – trackers represent 6-7% of the British market.
Last week’s announcement from FTSE that it will apply a threshold of 0.015%, rather than 0.025%, met with a positive response from the Association of Investment Companies (AIC). Updated figures from Wins shows that just eight trusts are likely to be affected by the new limit.
Daniel Godfrey, the director general of the AIC, says FTSE’s decision to relax the rules followed lobbying by the association. “We spoke to executives at FTSE in face-to-face meetings and in writing,” says Godfrey. “We are happy with the decision they have come to. The new basis of calculation does not suit us as an industry, but we have to make the most of the cards we have been dealt.”
However, exactly which trusts will be affected remains unclear. Simon Elliott, head of research at Wins, says some funds may yet fall into the relegation zone, depending on which traded volume data FTSE uses.