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JIA 97 _1971_ 343-349


									JIA 97 (1971) 343-349


                  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
  (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

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)
(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
 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
 8 September     Truman Hanbury Buxton                 Breweries                      Grand Metropolitan Hotels
13 September     Saunders Valve                        Engineering                    Gallaher
20 September     Wigham-Richardson   &                 Insurance (Brokers)            Slater Walker Securities
 5 October       Seafield Amalgamated Rubber           Rubbers                        Sime Darby Holdings
19 October       Qualitex                              Textiles                       Imperial Chemical
 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
 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
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
          Hawtin                   Engineering            Miscellaneous Financial
          Portals Holdings         Packaging & Paper      Miscellaneous Unclassi-
         Slater Walker Securities Miscellaneous Financial Merchant Banks
         Storey Brothers          Textiles                Miscellaneous Unclassi-
25 Oct. F H Lloyd Holdings        Miscellaneous Capital   Engineering
         J Saville Gordon Group Engineering               Miscellaneous Capital
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.

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