New index will oust Footsie

THE STOCK Exchange is planning a major overhaul of its indices, ousting the FT-SE 100 - the widely used 'Footsie' - as the main measure of share price changes and replacing it with a newly-created FT-SE 350.

The FT-SE 100, which reflects movements in the top 100 shares, will survive and be supplemented by a new FT-SE 250 index, showing movements in the next biggest 250 stocks.

These two indices will be combined in the FT-SE 350, which will be promoted as the most important market measure if the exchange's plans are adopted.

In addition there will be a series of industry baskets covering individual sectors such as textiles, property and electronics. This will allow investors to see at a glance how the different groups are performing from minute to minute.

The sector indices are expected to lead to the creation of options and futures, allowing investors to buy exposure to food retailers or engineers through trading derivatives rather than purchasing shares in, say, Sainsbury or GKN.

This would further boost the number of derivatives traded and reduce demand for traditional stockbroking.

Like the FT-SE 100, which was introduced in 1984 and quickly became the main indicator of market movements, the 250, 350 and sector indices will be updated throughout the day.

One result of introducing two new FT-SE indices is that it will no longer be safe to refer to Footsie, familiar name for the FT-SE 100, without causing confusion.

In addition the FT all-share index, which covers about 650 stocks, is to be extended to cover more companies. And a new index to cover smaller companies - all those excluded from the FT-SE 350 - will be created. Both these indices will be updated once a day.

The package of measures, which have yet to be finalised, is expected to be announced in October.

One advantage of the larger index is that companies will no longer attach such importance to being relegated from or promoted to the FT-SE 100 index.

At its next meeting the FT-SE 100 steering committee is expected to consider ejecting Hillsdown, whose value has fallen to pounds 677m, Pilkington, down to pounds 696m, and RMC, worth pounds 897m at the end of last week. Most companies in the index are worth pounds 1bn or more. Candidates for entry include TI, S G Warburg and BICC.

As the recession has taken its toll a large number of former blue chips have dropped out of the FT- SE 100. Recent departures include Trafalgar House, Royal Insurance and Asda Group.

At the same time privatisations have added to the number of quoted utility companies - BT, British Gas, electricity and water companies - qualifying for inclusion. The FT-SE 350 will be more representative of the market as a whole and less subject to cyclical changes.

Indexed fund managers, who promise to perform in line with the market rather than aim to beat it, expect to continue using the FT all-share index as their benchmark, but some may find the FT- SE 350 an attractive alternative.

As part of a package of changes the committees responsible for managing the FT-SE 100 and the FT all-share index will be amalgamated to avoid confusion, duplication and contradiction.

The two main UK indices have performed differently over the years. The FT-SE 100 lagged behind the all-share by 10 per cent in its first four years because the FT- SE 100 does not include small companies which outperformed for much of the Eighties.

But it has narrowed the gap since 1988, reflecting the poorer performance of smaller companies in recession.

The last indices introduced by the Stock Exchange were the Eurotrack 100 and 200, which measure Continental and European stocks respectively. But exchange trading of options and futures on the Eurotrack indices stopped soon after launch.