As of last week, Microsoft accounted for a roughly 3% chunk of a Standard & Poor's 500 index fund, and a $3-per-share dividend would raise the index fund's cash level by three-tenths of 1%.
"In our world of basis points and indexing, that's not small," said Patrick O'Connor, senior portfolio manager with BGI.
The index managers will invest that cash across the index, either buying a proportional slice of each component or, more likely, using an S&P futures contract overlay, Mr. O'Connor said.
Indexing is "a game of inches," and any indexer who sits on the cash instead of reinvesting it right away in, for example, an S&P futures contract, will risk tracking error, he said.
The Vanguard 500 Fund, the world's largest mutual fund with $101.1 billion as of July 21, held 97.6 million shares of Microsoft at the end of 2003. Investors in the fund may choose to receive the special dividend, but traditionally most opt to reinvest, said spokeswoman Rebecca Cohen.
There's more wiggle room for managers of active equity portfolios, although many insist even the mother of all dividend payouts isn't a major event for them.
"We're pretty big shareholders," with just less than a 5% position in Microsoft, but even so, the dividend will only come to about one-half of 1% of the fund, said Brian O'Toole, a portfolio manager for the $15.2 billion Putnam Voyager Fund, run by Putnam Investments Inc., Boston.
Mr. O'Toole figures most active portfolio managers probably won't plow that money back into Microsoft stock, even though he sees the software giant as "a good growth company with really terrific valuations."
Microsoft Chairman Bill Gates and Chief Executive Officer Steve Ballmer took pains last week to insist the dividend payout doesn't signal less exciting prospects for their classic growth company, but Mr. O'Toole believes many investors will reach that conclusion. They're basically saying, "we can't invest in anything better than you can," and this may well cement the view that Microsoft is at the early part of its "maturation phase," he said.
Asked where his fund might look to put that cash to work later this year, Mr. O'Toole cited consumer staples companies such as Procter & Gamble Co. and The Gillette Co. as stocks that have relatively good prospects of weathering a rising rate environment.
However, other managers said they wouldn't rule out channeling some of that dividend windfall back into Microsoft.
Investors have rewarded companies, especially those in the technology space, that have issued special dividends in the past, noted Larry Puglia, who manages the $7.5 billion T. Rowe Price Blue Chip Growth Fund, as well as another $3 billion in institutional money at Baltimore-based T. Rowe Price Group Inc. His more than 10 million shares of Microsoft come to 3.4% of his portfolio.