Royal Dutch Shell Group .com

Financial Times: Indexed poker playing: “Unlike Shell, though, PartyGaming is classically the kind of stock that pension fund trustees ought to avoid.”: Monday 12 Sept 2005


By John Plender

Published: September 12 2005


Last week's profit warning from PartyGaming, the online poker group, is another reminder of the perils and market distortions wrought by index tracking. Because the company was certain to go into the FTSE 100 within months of its June flotation, institutions herded in regardless of the fundamentals, knowing there would be big demand from tracker funds at the next index reshuffle.


 The fundamentals were pretty terrible. PartyGaming is a Gibraltar-domiciled business whose operations in its biggest market, the US, are of questionable legality. The chairman, chief executive and finance director had been with the company for less than a year before the flotation. The founders of the company retain majority control and the proceeds of the issue went straight into their pockets, rather than into the business.


As for corporate governance, the chairman is on a three-year contract in defiance of the Combined Code, and the independence of the non-executive directors has been compromised by huge signing-on fees and abnormally high remuneration.


The post-flotation surge in the shares echoed the market ructions in the summer over Royal Dutch Shell, where fund managers bought heavily before the re-weighting of the index. They were hoping to squeeze tracker funds scrambling to meet their benchmarks.


Unlike Shell, though, PartyGaming is classically the kind of stock that pension fund trustees ought to avoid. Yet if they track the FTSE 100 they are now forced buyers of a bursting online gambling bubble as well as a gaggle of underperforming megacap stocks over-biased towards oil, telecoms, pharmaceuticals and banks. No doubt they pat themselves on the back for their splendid relative performance, even though they have lost their beneficiaries a fortune since the March 2000 market peak.


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