KEN CLAY

THE stock market seems to have started the year in a pretty indecisive frame of mind.

The FTSE-100 share index is bobbing along around 300 points below its best level of last year, despite a fair number of forecasts that this year would see it rising to 3500.

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If it achieves that level, and not everyone is confident that it will, it will have managed a modest gain on top of recovering the fall of 10% or so which it suffered last year.

Although a lot of fund managers regard the All-Share Index as the benchmark for performance measurement, it seems right to pay a lot of attention to the Footsie 100 because it accounts for more than 70% of the market in terms of both capitalisation and activity.

It is an old saying that the Stock Exchange spends most of its time making up its mind about which direction it wants to move and only a small part of the year actually making that movement. Maybe that is why people say timing is the essence of successful investment.

When I was a boy of about nine or 10 I had a neat little instrument called a »seebackroscope». It was part of a junior detective’s kit. The idea was that while apparently looking forward you could put this thing to one eye and see behind you. Using this technique on markets it is often easy to spot when the mood changed from bull to bear or the other way round, although it is not always so easy at the time.

Knowing where you are and where you have been is, however, quite a useful start to working out where you are going. When the Stock Exchange announced two new sub-divisions of the FTSE-350 Index (the Footsie 100 plus the Mid-250 stocks), one to show the state of shares with an above-average yield and the other to log the below-average yield counters, it pointed out that higher-yielding stocks had outperformed the lower-yielding ones in six of the last eight years.

That, of course, does not give any indication of which way the market is going but it was an interesting comment, particularly now that the PEP market is likely to be concentrating attention even more heavily on high-yielders alongside the soon-to-be-permitted bonds, convertibles and preference shares. So much, however, for the seebackroscope.

Philip Wolstencraft, strategist at brokers Smith New Court, has recently taken an interesting look at where we are now in terms of ownership of the Footsie 100 stocks. Ownership is sometimes regarded as something to be thought about seriously only when a company gets an unwanted takeover bid and the directors need to look up who its investors are and make urgent contact.

Investors, however, can also find ownership interesting. Wolstencraft ferreted through the ownership lists of the top 100 companies compiled by Citywatch which monitors the company registers in order to identify the main under-weight and over-weight positions of the big UK institutional investors in relation to the Footsie 100 index itself. This, he commented, »may help us to focus on the areas where there may be a short squeeze».

The logic would seem to be that with so many fund managers tracking indices — perhaps as much as 15% of UK pension money is managed this way and the proportion is even higher in the US where the fashion started — a share price would respond quite noticeably if under or over-weight positions were to be reversed.

Nothing is totally easy or straightforward and, as with so many things to do with share markets, the information can be interpreted in two ways. If the institutions are under-weight in a particular share does that mean they will in time go to neutral or better weightings, one could legitimately ask. Or does it mean that this is a share which is likely to under-perform the rest of the pack? The opposite argument, of course, applies to over-weightings.

But the fact that, having seen the weightings position, you still need to do a bit of fundamental thinking about the anomaly shares before buying or selling them, takes nothing away from the value of the research. It is always useful to have somewhere to start from.

In relation to the benchmark, the most under-owned stocks in the portfolios of the top 50 UK institutions are HSBC, BP, Sainsbury, National Power and SmithKline Beecham. The most over-owned are Commercial Union, Land Securities, Sun Alliance, General Accident and MEPC.

The study notes that many of the under-owned stocks are in that position because of large Government (National Power), family (Sainsbury), or non-UK shareholders (HSBC). Excluding stocks where there is a large existing non-institutional shareholder it shows the biggest under-weight positions are held in BP, Hanson, Reuters, British Airways and Boots.

In a separate study taking a strategist’s look at 1995 and setting a Footsie 100 target of 3500, he selects 10 stocks which in his view could out-perform the market.

Commenting that he had been looking for shares which were »cheap, unloved, under-owned and yet are seeing evidence that profits and dividends are not a disaster after all and might even be rising by more than consensus expectations», he picks BAT, British Airways, ICI, TSB and United Biscuits from the Footsie 100, and BET, BPB, Hillsdown, Vickers and WPP from the Mid-250.

Outside this selection one of the bigger Footsie stocks, Hanson, seems to have been finding a few more friends recently. Smith New Court rated as a hold but it does offer a fairly competitive yield of around 6% against about 5% for the new higher yield index.