This $2.5 Trillion Index Wants to Wave Goodbye to Foreigners

  • CRH, Fresnillo, TUI may be removed from benchmark in review
  • Liberal Global, IHS Markit seen added: initial indications

The U.K.’s equity benchmark may soon lose some of its foreignness.

The London Stock Exchange Group Plc’s FTSE Russell is proposing changes to how it assigns nationality to firms on its global equity indexes. These changes could affect domestic benchmarks including the 2 trillion-pound ($2.5 trillion) FTSE 100 Index.

Because passive investors need to match the composition of the indexes they track, changes often force selling or buying. FTSE Russell says most U.K.-focused stock funds follow their benchmarks.

The criteria will include a company’s place of incorporation, headquarters, assets, revenue and its primary listing, according to a consultation survey closing Wednesday. Any changes would affect the provider’s global index series and there would be no immediate impact on domestic gauges such as the FTSE 100, according to an LSE spokesperson.

The new rules may eventually exclude Dublin-based construction firm CRH Plc, Mexican miner Fresnillo Plc, and German travel operator TUI AG from the FTSE 100, according to initial indications. The three stocks make up about 1.7 percent of the U.K. benchmark.

In turn, U.S.-listed Liberal Global Plc and IHS Markit Ltd. could be eligible for the FTSE 100.

“It is perhaps logical that clearly non-U.K. stocks do not stay in the index,” Societe Generale SA analysts led by John Carson wrote in a note late Tuesday. “We would imagine the LSE and the companies themselves not being keen on the companies being less represented in major indices however.”

In the FTSE 250 Index, the changes would affect Canadian TV and film distributor Entertainment One Ltd., Peru-based Hochschild Mining Plc, NMC Health Plc from the United Arab Emirates and Russia’s Polymetal International Plc. The FTSE Small Capitalisation Index could lose Lamprell Plc to the UAE. In total, 49 constituents of the FTSE Global Equity Index series would change nationality, according to the index provider.

The review stems from the 2015 merger of FTSE and Russell -- two of the world’s biggest index providers at the time -- which have historically used different methods to determine nationality. While FTSE Russell aims to apply the changes by June, Societe Generale analysts argue this is “too soon.”

“Our feeling is that any consultations or changes should be carried out due to investor demand or necessity and not driven by two providers coming together,” they wrote.

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