FTSE's new indexes of multinational companies have quickly drawn the attention of a few leading U.K. pension funds.
The Rover Group Ltd. Pension Scheme, Birmingham, England, a L4 billion ($6.6. billion) plan, is including the question of whether to invest in funds linked to the series in an asset-liability study with consultant Bacon & Woodrow.
BP Amoco Pension Fund, London, is keeping an "interested eye" on the index, waiting to see if it becomes an industry standard, said Gary Steinberg, head of investments for the L11 billion fund.
And sources said a L10 billion corporate fund in the United Kingdom has issued a request for proposals for a passive manager to run portfolios based on the series, effectively stripping out multinationals as a separate asset group.
Global influence
The advantages are obvious, FTSE and Bacon & Woodrow executives say. Multinational companies act as a generic asset class more than ever before, said Will Oulton, president of FTSE International Inc., New York. "Their influences are increasingly more global than local. The series takes out weighting anomalies of multinational companies" such as DaimlerChrysler AG in Stuttgart, Germany, and BP Amoco PLC, which is based in London.
Launched Oct. 1, the series' linchpin index tracks the 100 largest corporations worldwide that generate more than 30% of their revenue outside the countries in which they are listed.
To ensure that pension funds don't miss the local markets, the series includes indexes that track both multinational and local companies.
British investors such as Rover, for example, would continue to capture the U.K. stock market through investing in a fund linked to the new FTSE Local U.K. index, which does not include Britain-based multinationals.
Broad offerings
Pension executives at multinational corporations see sense in the index series' concept, Mr. Oulton said, because their employers' products are designed not for one country but by broad product lines.
Bacon & Woodrow researched the series with Barclays Global Investors before presenting the idea to FTSE, Mr. Oulton said.
The series, however, is getting a mixed reaction from consultants in both the United States and Britain. Some say it is better tailored to British than to U.S. pension funds. And one consultant -- BARRA RogersCasey -- has concluded multinational companies behave more like the country they are listed in rather than a separate asset class.
When a pension fund invests in international markets, the country effect and industry effect are still more important than global or multinational factors, said Patrick Rudden, managing director, director of equity research, with BARRA in Darien, Conn. "Factors like the local economy and the industry have more of an effect on the company than the fact it is a multinational."
The index, he said, "is no substitute for buying international stocks and bonds."
With its heavy weighting to large-cap U.S. growth companies, the index could allow U.K. funds to increase their investments in U.S. stocks through a "back door" of sorts, one consultant suggested.
Also, pension funds might be hard-pressed to find managers that can run both the multinational and local parts of the series, said Bill Muysken, head of global manager research, William M. Mercer Ltd. in London.
Currently, BGI is the only manager offering the fund series. Other major passive managers -- State Street Global Advisors, Boston, and the index team at Deutsche Bank Asset Management Americas in New York -- do not have plans to run funds based on the indexes.
Competitors alert
But that does not mean BGI's rivals are ignoring the competition. "If the market embraces it, it would be foolish" not to offer funds based the FTSE series, said Dean Barr, chief investment officer of Deutsche Bank Asset Management Americas.
Other major index creators, such as Morgan Stanley Capital International and Standard & Poor's, also are looking at the concept of a multinational index series, Mr. Barr added. S&P confirmed that it is considering such a move, MSCI would not comment.
Compared with the MSCI World index, the FTSE Global 100 has a large-cap growth bias, Mr. Muysken said. And "over recent years, large-cap growth stocks have done well," he said.
But Mr. Muysken noted recent cross-border mergers and acquisitions have pushed U.K. pension fund executives to take FTSE's new series seriously under consideration.
Two British stocks stand out, he said. "With British Petroleum swallowing up Amoco and Atlantic Richfield, its weighting is 10%" of the FTSE All-Share index, a widely used benchmark for British pension funds.
Adding to a skewed index is London-based Vodafone Group Plc's recent acquisition of Air Touch Communications, San Francisco. The telecom giant is now 5% of the All-Share index.
"Pension funds are uncomfortable" with 15% of the index in only two companies, he said.
But BGI argues that the funds have relevance to U.S. clients. It's true that U.K. investors have a strong home-country bias, but so do U.S. investors, said Steven Schoenfeld, principal and head of international equity strategies with BGI in San Francisco.
