When a stock or trust is elevated to the index, tracker funds have to buy it, meaning there is often a short-term boost to the share price. Charles Cade (pictured), head of investment companies research at Numis, says that the extra demand can reach 8 to 10 per cent of the share capital, but warns that taking advantage of such moves can be difficult.
"Some [trackers] can buy on anticipation, so you might have already seen some buying. Quite a lot of them tend to issue shares when there’s demand from trackers," he said.
"If they are trading on a discount, it may well tighten, but typically they do not want the premium to get too high."
The announcement of the rebalancing will be made this Wednesday, based on the closing market cap on Tuesday evening. That means things could change between now and close of play tomorrow.
"You need to be sure something is going in and know whether the company is going to issue shares or not," Cade said.
He points out that some trackers have the ability to buy before the rebalancing is actually carried out, meaning that some of the trusts may have already received the boost that comes with being included in the index.
Here are the trusts that look likely to be promoted.
TwentyFour Income IT
This trust has reached £161.3m in market cap since launch on 6 March this year, according to data from the AIC.
Cade says that it is one that could receive a significant boost to its share price in the near future.
"TwentyFour has just issued some shares trading at 2 per cent premium to NAV," Cade said.
"The trust is on about a 4 per cent premium, but you could well see that premium grow over the next few weeks as index-trackers buy."
Once the new shares start trading, the trust will be roughly £188m in size.
Our data shows that it has made 5.39 per cent since launch, but it targets a 7 to 10 per cent total return per annum over the next three years.
Performance of trust vs sector since 6 March
Source: FE Analytics
The trust invests in asset-backed securities on the European market, chiefly those backed by mortgages, and looks to exploit spread tightening as well as yield to maturity.
The fund has an estimated ongoing charge ratio of 1 per cent.
Montanaro European Smaller Companies IT
This trust has reached £81.3m in market cap, with the current cut-off for inclusion £74.4m (0.15 per cent of the total market cap of the FTSE All Share).
Cade says that investors are most likely to benefit from share price boosts to trusts that are on a discount, as the board is likely to be happy to see this figure tighten.
Montanaro European Smaller Companies is currently trading on an 11.09 per cent discount, according to figures from the AIC, close to its one-year average.
The trust has had a good 12 months in both NAV and share price terms, with NAV up 26.84 per cent and share price up 33.26 per cent. The MSCI Europe Small Cap index has made 33.27 per cent in this time.
Performance of trust vs sector over 1yr
Source: FE Analytics
The fund is well-rated by Winterflood Securities analysts, who say that it has a high P/E and P/B ratio compared with its peers, thanks to its focus on quality companies rather than valuations.
Nevertheless, they expect it to do well over the longer term.
The trust has ongoing charges of 1.55 per cent.
Baillie Gifford Shin Nippon / Fidelity Japanese Values
Baillie Gifford Shin Nippon is, at £81.3m, currently large enough to qualify for the FTSE All Share, according to Numis’s figures, while Fidelity Japanese Values sits £300,000 below the limit.
The latter would be a better bet for investors looking to trade the promotion to the FTSE, Cade explains, as it is on a discount of 10.79 per cent.
However, he warns that the volatility of the Japanese market is likely to outweigh the effect of joining the FTSE All Share anyway.
Baillie Gifford Shin Nippon, another Japanese smaller companies trust, sits on a 3.3 per cent premium, and Cade says it is one he would expect to see take action to close the premium if it saw any significant surge following promotion.
Both are significantly up on the year, with the Baillie Gifford trust making 28.07 per cent and the Fidelity trust up 24.93 per cent, according to our data.
However, both trusts have seen large falls since the Japanese markets came off in mid-May.
Performance of trusts vs sector in 2013
Source: FE Analytics
The Fidelity fund charges 2 per cent and the Baillie Gifford fund 1.53 per cent.
Cade points out that the benefits of being in the FTSE are not just limited to a short-term share price boost.
The presence of a new significant institutional shareholder can benefit existing shareholders, raising the profile of the trust and improving liquidity.
Other trusts that look likely to join the list include the £86.7m BlackRock North American Income Trust, which is already sitting on a premium, with Cade predicting it will take action to prevent this figure rising by too much, and the £278m Greencoat UK Wind fund, which FE Trustnet looked at in detail last week.
FE Alpha Manager Gervais Williams’ Miton Diverse Income Trust, which is currently on a 1.8 per cent premium, qualifies for inclusion at £137.2m.
Brevan Howard Credit Catalysts, an £87.4m offshore hedge fund specialising in credit- and asset-backed securities, also currently qualifies.
