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Free float sees Japan market cap in free fall

Passively managed funds should now reflect the indices that they track more accurately after the FTSE switched to free float last week.

Free float requires fund firms to cut investments in companies with high proportions of shares unavailable for trading. Tracker managers now only have to buy shares in proportion to the number of shares that are tradable, meaning prices are not forced up by traders chasing £1.4 trillion of FTSE index shares.

Fund managers say this removes investor concerns over distortions caused by bunching of shares.

The funds most affected are tracker funds investing in Japan, Far East and Europe ex UK.

The biggest reduction in market capitalisation is in Japan, where 23.9 per cent of the market is affected by corporate cross-holdings and privately owned shares. The Europe ex UK market cap is down by 11.2 per cent, due to high levels of Government-owned shares.

BSkyB saw the biggest change in its weighting, on account of large holdings by Rupert Murdoch and Vivendi. The UK market cap reduction is 2.2 per cent.

Barclays Global Invest-ors head of investment strategy Chris Sutton says: “The changes are particularly apparent in Japan and the Far East where quirks have been stripped out of the indices.

“If a fund is doing well it is because of exactly what is happening in the fun, which has to be a good thing.”

l Analysis, p12

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