"Risk of clustering" is a rather unwieldy term. Appropriately, it has negative connotations in stock market jargon. The risk of clustering describes the concentration of a portfolio on a few securities, sectors, countries or currencies. This overweight can result in performance being distorted – conflicting with the approach of have the greatest possible diversification of capital. The SMI has always tended to go hand in hand with the risk of clustering, with the leading Swiss index being dominated by Nestlé, Novartis and Roche. The SIX intervened in 2017, since when the share of an index member has been limited to 18%. The stock exchange did so in order to adjust its central barometer to EU diversification regulations. Nevertheless, the dominance of the above trio remains high: Nestlé, Novartis and Roche now make up almost half the SMI.
Mathematically it is only logical that a weak performance from the heavyweights will put the brakes on the barometer, which contains a total of 20 stocks. Seen over a year, the SMI TR Index – where the dividends of the index members are factored into the calculation – has been treading water. Over the same period, though, the DAX, EURO STOXX 50 and S&P 500 have seen double-digit percentage growth. Nestlé and Roche have played a major part in the underperformance of the Swiss benchmark relative to its counterparts from Germany, the eurozone and the USA. The food/pharmaceuticals giants bring up the rear in the SMI with price falls of 19% and 21% respectively. Novartis managed a rise of 3.6% in the 12-month period, but even that is not enough to make it a driving force for the Swiss stock market.
Two years ago, "Finanz und Wirtschaft" responded to the flaws of the domestic equity market when the editorial team behind the respected financial publication created the FuW Swiss 50 Index. The aim was and is to obtain a much more diversified picture of the Swiss economy and its biggest listed companies. Only shares which achieve an average daily trading volume of at least CHFmn 5 over a period of one and six months are considered for inclusion in the select 50. All stocks that make it over this hurdle are sorted according to their free-float market capitalisation. The 50 companies with the highest stock market values are included in the index. The shares in the first 25 places of the ranking are given a weighting of 2.7%, while those in the lower half of the table go into the FuW Swiss 50 Index with a 1.3% weighting each.
Every six months there is a rebalancing process in which the composition is reviewed based on the criteria just outlined. The weightings are then reset according to the values provided for in the method. The appointed date for the first of the two annual reviews of the FuW Swiss 50 Index was 4 April, when it was decided that there would be two changes on 2 May. The first of these is the return of generics manufacturer Sandoz to the benchmark. The share had already been added to the FuW Swiss 50 Index once on 4 October 2023 following its spin-off from Novartis. The large cap dropped straight out again just one month later, however, because Sandoz had not met the requirement of a six-month stock market history at the time of the rebalancing. Industrial group Comet will be joining the pharmaceutical company in the select 50 from the beginning of May. The market value of the semiconductor supplier has jumped sharply in recent months on the back of the general euphoria surrounding AI. By contrast, the capitalisation of Cembra Money Bank has fallen, with CHFbn 2.1 no longer enough to retain membership. DKSH Holding will likewise be bidding farewell after its securities failed to meet the criterion of trading volume.
Source: Leonteq Securities AG