BERLIN -- If you've invested in a European index-tracking mutual fund, the tiny bits of the Continent's blue-chip companies that you own are about to get a good shuffling.
Last week, index compiler
announced plans to shift its indices to free-float weightings, meaning stocks will be rated on the shares actually available to investors instead of a company's total market capitalization. Firms that still have large government-controlled stakes like
will see their rankings scaled back considerably, while other, smaller companies may be tossed out of indices like the pan-European
Dow Jones STOXX 50
For mutual fund investors, that might not mean much more than your portfolio manager getting a headache from having to rejuggle the holdings of his or her fund. But investors holding shares or ADRs of the specific companies being reweighted or thrown in or out of a prestigious index could be in for a rocky ride if they aren't paying attention.
As investors digested the Stoxx news last week, Deutsche Telekom and France Telecom lost heavily while telco-equipment makers
all surged higher. By Friday DT and France Telecom had shaken off the initial shock, closing up 1 5/8, or 2.91%, and 1 9/16, or 1.1%, respectively. However, those shares and others could experience continued volatility in the coming week and beyond as investors sort out the final implications of the free-float decision.
On Friday, Stoxx published new estimates based on the reweightings and the effects were considerable. Deutsche Telekom dropped from the second-largest company according to free-float market cap to No. 6, while France's Alcatel vaulted from 13 to No. 5
Stoxx will announce the final alterations to its blue-chip indices after the summer holidays in August and the changes will then go into effect on Sept. 18. Until then the shares of companies thought to be getting booted from indices will likely come under pressure, as investors try to get ahead of the index-trackers who will only rejigger their portfolios when the actual change takes place.
"From a stock-by-stock point of view the changes could be pretty significant," says Anna Mackman, an equity strategist for
Credit Suisse First Boston
in London. The stocks expected to be adversely affected by the new weighting "will probably work through the initial hit
from last week over the next couple of months and will then get hit again as the actual change takes place in September."
According to research by
Dresdner Kleinwort Benson
, German insurer
and Dutch telco
will both be dropped from the Stoxx 50.
will take their places. In the euro-zone specific Euro Stoxx 50 French food giant
is in and German retailer
Munich Re may get pushed out because the new weightings not only affect big government-held stakes, but also large corporate cross-holdings, which Munich Re and fellow insurer
have extensively. However, things could change rapidly beginning next year, as the German government is working on tax reform proposals that could eliminate a punitive corporate-gains tax and unleash a massive rejuggling of holdings.
After the Stoxx announcement
said it had no plans to change its weighting rules for such indices as the
. But the national indices would be under pressure to do so if other big international index compilers such as
follow Stoxx to free-float rankings, according to Mark Howdle from
Schroder Salomon Smith Barney
And that could mean your slice of corporate Europe might get shuffled all over again this fall or next year.