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JIA 97 (1971) 343-349 343 NOTES ON THE FINANCIAL TIMES– ACTUARIES INDEX IN 1971 BY J. C. H. BRUMWELL, M.A., F.I.A. 1. Classification of Stock Exchange Securities by Industry in 1971 As a result of quarterly meetings of the Index Constituents & Industrial Classification Committee, the classifications of 47 companies were changed—either because the original classification was found to be wrong, or because the company had clearly changed its business. These changes were only made after notification to the company concerned and in most cases after discussions with the company; 86 companies were, in fact, approached. Classifications of newly floated companies were made by the Stock Ex- change Quotations Department but the published lists were scrutinised and occasional changes were recommended. Category No. 28: ‘Machine Tools’ was renamed ‘Machine and Other Tools’. Ten minor amendments were made to the detailed definitions of the categories, and these are incorporated in the latest Classification Supplement to the Stock Exchange Weekly Official Intelligence. 2. Constituent Changes in the Equity Indices during 1971 Eight of the 47 reclassifications referred to above concerned index constituents and the appropriate index reclassifications were made (see Table C). The number of constituents disappearing as a result of bids, mergers or other casual- ties fell further to 33 in 1971 from 41 in 1970—just under half the peak of 68 in 1968— although the year’s total masks a very low figure (11) for the first half year with a marked recovery in the later months. These constituents, together with 5 others dropped in May for reasons of size and marketability, are set out in Table A. The corresponding replacements are set out in Table B. The total of all capital changes (not just those involving changes of constituents, and excluding the special changes at the year end) also showed a further fall from 481 in 1970 to 461 in 1971. Equity constituents which changed their names are set out in Table D. 3. Corporation Tax As a result of the announcement by the Chancellor of the Exchequer in his Budget Speech, earnings yields and price earnings ratios were recalculated on a 40% basis with effect from 30 March 1971. 4. Decimalisation The changes following decimalisation of the currency on 15 February 1971 were minimal and concerned with punching prices on the new basis. The necessary alterations to the programme were made during the period immediately preceding change-over whilst the Stock Exchange was closed. 344 Notes on the Financial Times–Actuaries Index 5. Fixed Interest Index Changes (A) Commercial & Industrial Preference Index Three changes were made on 29 January 1971: (i) following the Pirelli Scheme, Dunlop 5½% Cumulative Preference became Dunlop Holdings 5¾% Cumulative Preference (ii) International Publishing Corporation 8% Cumulative Preference, which had become relatively unmarketable since an optional scheme for an exchange into unsecured loan stock, was replaced by Thomson Organisation 8% Cumulative Preference. (iii) Scottish & Newcastle Breweries 5½% Cumulative Preference was replaced by the more marketable 7¾% Cumulative Preference of the same company. (B) 20 Year Government Stock Index Since 10 November 1965, the 20 year Government stock yield average had been based on the formula:- where t was the number of days since 31 December 1964, and where Y2, Y3 and Y4 were respectively the average yields of the pairs of stocks indicated: Y2 = 3½% Treasury Stock 1979–81 and 5½% Funding Stock 1982–84 Y3 = 3% British Transport Stock 1978–88 and 5% Treasury Stock 1986–89 Y4 = 3% British Gas Stock 1990–95 and 5¾% Funding Loan 1987–91 On 20 March 1971 t reached 2270, the pair of stocks providing Y2 dropped out of the formula, and a new pair was introduced: Y5 = 6¾% Treasury Loan 1995–98 and 8¾% Treasury Loan 1997, the formula becoming: where t is now the number of days since 31 December 1970. The exact future lives of the three new pairs on 31 December 1970 were 18.14, 22.30 and 27.00 years respectively and the above formula produces each day the required average term of 20 years. The price index is now based on the formula Y = (Price at time t) x 1.15331 where price at time t relates to a 20 year stock with a 5% coupon (formerly 4%) and a current redemption yield of Y. 6. End of the Year 1971 Further changes in the equity indices were made at the end of 1971: (a) The Aircraft & Components subsection was discontinued; following the loss of Hawker Siddeley (see Table C) and Rolls-Royce (Table A) the subsection was no longer viable and the two remaining constituents (Dowty Group and Westland Aircraft) were transferred to Engineering (General) (see (c) below). (b) For some time the Committee had been considering the subdivision of the Engineer- ing subsection which comprised about 80 diverse companies. It was first agreed that any such split should not subdivide any of the Stock Exchange ‘4000 categories’ (defined in J.I.A. 1971, 97, 111),and it was decided that a new subsection ‘Engineer- Notes on the Financial Times-Actuaries Index 345 ing (Heavy)’ comprising categories 20, 25 and 29 should be hived off the Engin- eering subsection. The sixteen companies concerned are set out in Table E. (c) The sixty-four constituents in categories 21, 22, 23, 24, 26 and 27 remaining in the Engineering subsection, together with the two constituents from the discontinued Aircraft & Components subsection (category 11) became the ‘Engineering (General) subsection. (d) The ‘Machine Tools’ section was renamed ‘Machine & Other Tools’. (e) Members of the Committee had become increasingly conscious of a conflict of interest arising over the Investment Trusts subsection, which formed a part of the Financial Group. In so far as the Index was originally intended to represent United Kingdom commerce and industry, avoiding “double counting” (which explains the exclusion of Burmah Oil and Imperial Metal Industries), investment trusts should not have been included in the Index at all, since the trusts reflect the behaviour of U.K. market (largely the other constituents in the All Share Index) as to perhaps 75% of their capitalization, the remainder reflecting their ownership of investments abroad. On the other hand the All-Share Index is particularly appropriate to the measurement of portfolio management performance, and the majority of portfolios subject to such analysis do include a greater or less proportion of their funds in in- vestment trusts. A compromise between these two views was arrived at by including twenty Investment Trusts, with average market value (at the end of 1971) of nearly £70 millions, in the Financial Group. The trusts had not been altered from the original twenty introduced in 1962, despite the fact that seven or eight times as many had a capitalization of over £5 millions which would qualify them as a constituent in any other subsection. Inclusion of more trusts could have resulted in them having undue weight relative to the remainder of the Financial Group. It was decided that at the year end the Investment Trusts subsection should be removed from the Financial Group, expanded to fifty constituents (the additional thirty being set out in Table F) and reintroduced as a new Group within the All-Share Index, which then comprised the 500, the Financial Group (101 constituents) and the Investment Trusts Group-a total of 651 shares. The effect was nearly to double the Investment Trusts’ capitalization (with a ‘qualification’ level of some £25 millions capitalization in October 1971), but this was not too large a weighting now that the Group was out- side the Financial Group. Fortuitously, none of the original twenty constituents had been involved in the recent schemes to benefit surtax payers by, for instance, giving small annual capital- ization issues in lieu of dividend to a second category of equity holders. Five of the new constituents did have a second class of equity capital and, in order to avoid difficulties with regard to the overall group dividend yield, etc., it was agreed only to include the (dividend-bearing) Ordinary capital of these five in the index, but earn- ings are calculated to cover the whole equity capital of each trust. 346 Notes on the Financial Times–Actuaries Index Table A—Constituents replaced after being taken over, etc. Date of Index Control acquired by, or Replacement Constituent Replaced Classification reason for replacement 25 January Richard Johnson & Nephew Engineering Jesse1 Securities 8 February Plymouth Breweries Breweries Courage 16 February Regis Property Holdings Property British Land 24 February Rolls-Royce Aircraft and components In liquidation 2 March Coast Lines Shipping Peninsular & Oriental 3 March Vehicle & General Insurance Insurance (Composite) In liquidation 27 April Ryman Conran Office Equipment Burton Group 5 May Allied Insulators Electricals Culter Guard Bridge Holdings Packaging & Paper Dufay Bitumastic Building Materials See Note Jefferson Smurfit Group Packaging & Paper Stothert & Pitt Engineering 19 May Brickwoods Breweries Whitbread 2 June Parkinson, Cowan Household Goods Thorn Electrical 9 June Brightside Engineering Holdings Miscellaneous Capital Jesse1 Securities 10 June Williams Hudson Miscellaneous Un- Adepton classified 7 July J & F Stone Lighting & Radio stores Great Universal Stores 12 July Bulpitts (Swan Brand) Household Goods 3 August Tillotson & Son Packaging & Paper St Regis Paper 18 August John Myers United Drapery Stores Singer & Friedlander Holdings Merchant Banks C T Bowring 20 August Lines Brothers Toys & Games In liquidation 24 August A B Fleming (Holdings) Newspapers & Publishing Croda International 2 September Bovril Food Manufacturing Cavenham 6 September Cunard Steam Ship Shipping Trafalgar House Investments 8 September Truman Hanbury Buxton Breweries Grand Metropolitan Hotels 13 September Saunders Valve Engineering Gallaher 20 September Wigham-Richardson & Insurance (Brokers) Slater Walker Securities Bevingtons 5 October Seafield Amalgamated Rubber Rubbers Sime Darby Holdings 19 October Qualitex Textiles Imperial Chemical Industries 1 November A & S Henry stores Great Universal Stores 16 November Alliance. Property Holdings Property Cornwall Property (Hold- 2 December Limmer Holdings Contracting & Construc- Tarmac tion 6 December Britax-Excelsior Motors & Distributors Griffiths Bentley 28 December Midland Electric Manufacturing Electricals (excl. elec- Delta Metal tronics, radio & TV) Purle Brothers Holdings Misc. Unclassified Redland United Transport Misc. Unclassified British Electric Traction 31 December William Hill Organization Entertainment & Sears Holdings Catering Note: 5 companies were removed from the index on 5 May, four of them failing for the third successive 6 monthly check to achieve a £2 million capitalization, and the fifth was an Irish-registered company which had been introduced in error during 1970. Notes on the Financial Times–Actuaries Index 347 Table B—New Constituents, replacing those removed in Table A Date of Introduction New Constituent Index Classification 25 January Central Manufacturing & Trading Engineering 8 February H P Bulmer Breweries 16 February Alliance Property Holdings Property 24 February Harmo Industries Motors & Distributors 2 March John I Jacobs Shipping 3 March Orion Insurance Insurance (Composite) 27 April National Carbonising Miscellaneous Unclassified 5 May Camrex (Holdings) Building Materials General & Engineering Industries Engineering Golden Egg Group Entertainment & Catering James Neil1 Holdings Machine Tools TPT Packaging & Paper 19 May Jonas Woodhead & Sons Motors & Distributors 2 June A W (Securities) Household Goods 9 June Myson Group Miscellaneous Capital Goods 10 June Brook Street Bureau of Mayfair Miscellaneous Unclassified 7 July John Menzies (Holdings) Stores 12 July Denbyware Household Goods 19 July Nova (Jersey) Knit Textiles 3 August Beatson, Clark Packaging & Paper 18 August Matthews Wrightson Holdings Insurance (Brokers) John Peters (Furnishing Stores) Stores 20 August M Y Dart Toys & Games 24 August Richard Clay Newspapers & Publishing 2 September Scot Meat Products Food Manufacturing 6 September Shipping Industrial Holdings Shipping 8 September J Coral Holdings Entertainment & Catering 13 September Northern Developments (Holdings) Contracting & Construction 20 September Stenhouse Holdings Insurance (Brokers) 5 October Kulim Group Rubbers 19 October Rexmore Textiles 1 November Standard Tyre Motors & Distributors 16 November Cornwall Property (Holdings) Property 2 December W & C French Contracting & Construction 6 December Griffiths Bentley Motors & Distributors 28 December Barclay Securities Miscellaneous Unclassified Dorman Smith Holdings Electricals (excl. electronics, radio & TV) Ralph Hilton Transport Services Miscellaneous Unclassified 31 December Dixons Photographic Entertainment & Catering Note: The replacement on 19 July was necessitated by the transfer (see Table C) of Hawtin out of the Industrial and 500 Indices into the Financial Group. 348 Notes on the Financial Times–Actuaries Index Table C—Index Subsection changes following reclassification of Constituents in the Stock Exchange Daily Official List Date Constituent Former Classification New Classification 19 July First National Finance Merchant Banks Hire Purchase Corporation Hawtin Engineering Miscellaneous Financial Portals Holdings Packaging & Paper Miscellaneous Unclassi- fied Slater Walker Securities Miscellaneous Financial Merchant Banks Storey Brothers Textiles Miscellaneous Unclassi- fied 25 Oct. F H Lloyd Holdings Miscellaneous Capital Engineering Goods J Saville Gordon Group Engineering Miscellaneous Capital Goods Year End: Hawker Siddeley Group Aircraft & Components Engineering (General) Table D—Constituents which have changed their names Former Name New Name Ault & Wiborg Ault & Wiborg Group Boots Pure Drug Boots Bovis Holdings Bovis Cable & Wireless (Holding) Cable Trust Cavenham Foods Cavenham Dunlop Dunlop Holdings G N Haden & Sons Haden Carrier Hattersley Stelrad Stelrad Group Hawtin Industries Hawtin James Howden & Godfrey Howden Group Industrial Finance & Investment Dawnay Day Group Lankro Chemicals Lankro Chemicals Group Lunt Comley & Pitt L C P Holdings Tom Martin Tom Martin Metals Group News of the World Organisation News International Richards & Wallington (Plant Hire) Richards & Wallington Industries Seager Evans Long John International Tarmac Derby Tarmac Yorkshire Dyeware & Chemical Yorkshire Chemicals Notes on the Financial Times–Actuaries Index 349 Table E—Constituents hived off the ‘Engineering’ Subsection to form the new ‘Engin- eering (Heavy)’ Subsection at the end of 1971 B H D Engineers International Combustion (Holdings) Babcock & Wilcox Simon Engineering British Rollmakers Corpn Steetley Capper-Neill Swan Hunter Group Clarke Chapman-John Thompson Vosper Davy-Ashmore Wellman Engineering Corpn Matthew Hall Whessoe Head Wrightson Woodall-Duckham Group Table F—Constituents added to the Investment Trusts Group at the end of 1971 *American Trust Metropolitan Trust *Border & Southern Stockholders Trust Monks Investment Trust City of London Brewery & Investment Northern American Trust Trust (Deferred) Raeburn Investment Trust *Clydesdale Investment Scottish Eastern Investment Trust Continental & Industrial Trust Scottish Investment Trust Debenture Corporation Scottish Northern Investment Trust Edinburgh & Dundee Investment Scottish United Investors First Scottish American Trust *Scottish Western Investment Guardian Investment Trust Sphere Investment Trust Philip Hill Investment Trust Stockholders Investment Trust Investors Mortgage Security Trustees Corporation Lake View Investment Trust United British Securities Trust London & Provincial Trust United States Debenture Corporation London Trust (Deferred) *Witan Investment Merchants Trust * These five trusts have two classes of equity, and in each case only the Ordinary shares are included.
"JIA 97 _1971_ 343-349"