Historically the main problems have arisen not from free floats as such but from cross-holdings, especially in Japan. Moreover MSCI likes to use consistent methods across the whole range from developed to emerging economies. In emerging markets there is often a lack of transparency, making the free float approach hard to apply, and anyway the average free float in emerging markets is often under 25 per cent, compared with 56 per cent in developed markets. A key factor is the growth in index-tracking, with the associated trend towards the benchmarking of the portfolios of active managers. Within only the past five years or so weightings have become highly important.
Portfolio managers have, in effect, become forced buyers of important listed companies.
Fund managers have now become wise to these distortions. It would surely have been better if they had changed their own methodology, to avoid being under formulaic pressure to buy overpriced stocks. However, it is easier for them to blame the index providers and ask for rule changes. Free floats can be hard to pin down in practice, however. Definitions may vary, information may be poor and situations can change suddenly when shares come on to the market, or alternatively are subject to buyback programmes.