hiriskpaul wrote:OhNoNotimAgain wrote:You are quite correct about the "free float" point. However, it should not matter to an investor who owns the rest of a company, whether it is other funds, the founders or overseas holders. All he wants is to participate in the financial return of the company and decide what proportion of his portfolio to allocate to it. Illiquidity due to limited free float is a well known way of pushing up valuations. When that happens the mkt cap tracker naturally follows and new money is allocated accordingly in line with the free float adjusted index weight, irrespective of any considerations of value or economic return.
Right, so we are agreed that if company A has a free float of $1T and company B $1B a cap weighted index fund would buy $1m of A for every £1k of B. Now you say "Illiquidity due to limited free float is a well known way of pushing up valuations". Hardly well known as this is first time I have heard of it. Can you point towards evidence or is this just a new spurious accusation made by active managers attempting to undermine index funds? As before, if this was true then it presents an opportunity for active fund managers to make money at the expense of index funds, which as I have previously explained cannot happen.
Well, the guy who pushed it to extremes was Mr Woodford who invseted in unlisted companies and said the valuation was what he paid and no one else could trade against him. Fine as long as money was flowing in, but not so good when you want to offload.
More generally the South African mining conglomerates in the eighties, Cons Gold, GenBel, Anglo, De Beers were well know for their interlocking shareholdings that reduced their vulnerablity and inflated their valuations. But perhaps the best example was the Japanese stock market in the seventies and eighties where valuations reached stratospheric (Nikkei at 40,000) levels due to their interlocking shareholdings.
Your point about overseas holddings in the previous post is also very valid. However, don't forget that AIM is not part of the FTSE All All share so funds can buy small stocks, push up prices which gets reflected in fund valuations and then, hey presto, the manager can claim to have beaten the market. But like, going overseas, they beat the market by investing outside it, and, in this case, supercharging returns by weight of money in a thin market.