What happens if SJP leave the FTSE100?

Peter McGahan looks at what happens when any share falls out of the Footsie

A no deal, or bad deal, would pulverize sterling and the FTSE100 would outperform the domestic market
What does happen when any share falls out of the FTSE100?

I’ve had a few queries regarding St James’s Place (SJP) leaving the FTSE100, and concerns about customers losing their money, so I’ll cover that one off.

Firstly, some journalists in certain newspapers love a headline. Others love facts. I find the drama unnecessarily upsetting for SJP customers and wholly inaccurate.

Is your money in difficulty if they fall out of the FTSE100? No. Is SJP in difficulty if they fall out of the FTSE100? No.

Does it affect the performance of your money and funds invested? No, unless you own their stock directly in which case the rest of this column will be useful.

I am critical but fair on SJP as an independent financial adviser. The performance is lack lustre, the charges way higher than a good independent financial adviser who is using the whole market, and the products available are inferior to those of an independent financial adviser. I have friends who have worked with them and still are in various levels and they often message me after my columns on SJP’s charges and performance.

With consumer duty approaching, they reduced their charges, which wiped 16% off their share price. They fell a further fifth when the Financial Conduct Authority (FCA) said to go further on their charges which have been described as opaque, even by a non-exec director at the firm at the time. Even with that, their charges are still under pressure, but they will have to come down again to match what an IFA offers, as IFAs are using all the products available in the market.

Net inflows to SJP fell to £700m from £2bn, due to elevated outflows. Not nice, but still a net £700m. On top of this, they had to set aside £426m to cover for customers who haven’t been serviced correctly.

That aside, what does happen when any share falls out of the FTSE100?

Naturally there is downward pressure on the share price. Passive funds (Index Trackers and Exchange Traded Funds) are colossal holders of FTSE100 stock (around £100bn)and have to re-adjust what they hold if a stock falls out, so they sell automatically which drives prices down.

Furthermore, this creates negative sentiment and people talk about why the share price is falling.

This can often occur well in advance as the analysts can see it is happening as they calculate market capitalisation of stocks and their performance relative to other organisations in the index.

Because of that, the ‘vulture’ short funds move in. ‘Shorting’ is where fund managers bet on a stock falling, and, if they are confident, they can take very big positions on that.

If they believe the stock will fall, and the market sees it, you have an increase in sellers of the stock in normal active management funds; you have the ‘shorters’; and you then have the sellers at the end in passive funds. They, however, are selling the stock much cheaper than those active managers who not only could see it was due to happen but were able to sell out. It is one of the disadvantages of holding passives – sit and watch as it falls.

Peter McGahan (Mal McCann)

In some ways the final fall is already in the price because speculation in the pre-announcement period of a stock exiting can be two to three months, and you might expect a 5% to 10% fall here. You then have the immediate pre-announcement which is two to four weeks prior to announcement and that can be a further 5% to 10%. The post announcement reaction can be another 5% to 10%, as much of the hit has already happened.

Supporting the fall, is the fact that all FTSE250 trackers (the next top 250 most valuable companies after the FTSE100) will now invest in the stock, but this is a much smaller capital amount of around 15 per cent of the FTSE100 index - and they could very well become a takeover target.

  • Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial or investment question, call 028 68632692.