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OPINION

Chart: A FTSE 100 post-admission bounce?

Chart: A FTSE 100 post-admission bounce?
September 29, 2016
Chart: A FTSE 100 post-admission bounce?

The criteria for inclusion in the FTSE 100 is slightly less straight-forward than the name implies. An equity needs to have a free float of at least 25 per cent and be among the 90 largest equities by market cap three days “before the first Friday of the review month”. Conversely, drop below a holding pen which reaches down to the 110th largest company, and you’re out.

As the graph below shows, the switch effectively occurred in the days following the Brexit vote several weeks earlier, when investors piled into dollar-earning gold miners and ran scared from previously sought-after UK property shares.

Conventional wisdom would suggest that entry into the index is good news for a stock, as funds start to track or hug the performance of London’s top shares. As Polymetal chief executive Vitaly Nesis told us this week, the picture is a bit more complicated. Because it is relatively easy for markets to anticipate constituent changes in advance, buyers do not typically wait for the official admission announcement. In Polymetal’s case, factors such as movements in the gold price, fluctuations in sterling, the dollar and the rouble, and last week’s secondary placing by two private equity owners at a discount had a greater impact.

The result? A 13 per cent decline since its re-admission (though the stock has done fantastically well in 2016). Funds’ blind buying power isn’t everything.