People investing in pensions, savings bonds, and insurance policies that track the stock market are at risk because the market is dominated by only a few big companies.
Index concentration, where a few companies make up the bulk of the index’s value, is most pronounced in the UK, German and French markets, Fidelity International has found.
This causes a problem, because these stocks tend to come from a limited number of sectors, for example the five largest UK banks account for over 16 per cent of the FTSE All Share Index’s value.
This means that a problem in the banking sector would hit index-tracking funds hard due to their heavy reliance on banks.
The 18 biggest companies in the UK make up 50 per cent of the value of the FTSE All-Share Index, but most represent just five sectors: oils, banks, pharmaceuticals, mining and telecoms, Fidelity points out.
And the situation is set to worsen if Royal Dutch Shell goes ahead with plans to replace its dual market listing in the UK and Holland with a single quotation on the London Stock Exchange.
Shell could then – on its own – make up more than six per cent of the total market value.
And linking to an index – rather than investing in growth – could see earnings constrained as well as exposure to risk increased.
“You cannot be an effective stock-picker if you are constrained by the index… My ‘go anywhere’ mandate means I can look for value in the large, mid-cap and small cap regions of the market,” said Sanjeev Shah, manager of the Fidelity UK Aggressive Fund.
The problem of sector concentration is equally prevalent in France and Germany, Fidelity notes.
Currently ten companies account for more than 60 per cent of the French CAC 40 index, while in Germany the top ten firms comprise 54.3 per cent of the HDAX index.
Index concentration is less noticeable in the US and Japanese markets.
The top ten companies in the Standard & Poors 500 Composite and the Nikkei 225 account for just 21 per cent and 30 per cent of the indices respectively – even though both lists contain fewer stocks than the FTSE All-Share.
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