The exchange added the trust to the index at the end of October after Natural Gas Corporation completed its takeover of TransAlta.
Foreign and Colonial, which is dual listed in London and New Zealand, has been quoted on the local market since 1993. Its capitalisation in New Zealand is $142 million, but its total assets are a massive $10.9 billion.
While Craig and Co, in a client newsletter, is trumpeting the move and hoping more trusts will be added to the index, a number of fund managers are trying to get the exchange to change its mind and remove Foreign and Colonial from the NZSE40.
The main reason is that the trust, which invests in international shares, has nothing to do with the New Zealand economy.
BT Funds Management equity manager Andrew South says Foreign and Colonial is "totally irrelevant" for an investor focused on the New Zealand market.
"For me it has no place in the index."
AMP Henderson Global Investors New Zealand equities manager Stephen Walker is one manager who has written to the exchange seeking the removal of the trust from the index.
He says the exchange was within its rights to include the trust in the index. Removing it is a matter of principle as the trust isn't a New Zealand based business. Managers can't research it because all it does is invest in foreign shares.
Researching it would be the equivalent of researching a competitor's portfolio and seeing if they should buy it.
Guardian Trust Funds Management equities manager Ian Arkle says putting Foreign and Colonial into the NZSE40 is a "bizzare" decision.
"(Foreign and Colonial) is the last thing you would have expected in an index."
He asks what stops the exchange putting something like WiNZ into the index as it is essentially the same thing - a mutual fund investing in international shares.
A comparison has been made between Foreign and Colonial and investment vehicles such as GPG, Brierley Investments and Infratil. Managers spoken to say the fundamental difference between these companies and the trust is that they invest in New Zealand businesses.
Stock Exchange managing director Bill Foster says the trust's inclusion in the index has raised some valid points which the exchange hasn't had to deal with before.He says the trust isn't likely to be removed at this stage, however the exchange is looking into the issue.
Craig and Co research manager Cameron Watson says Foreign and Colonial is a welcome addition to the index.
"With the globalisation of financial markets set to continue one wonders how long it will be before other investment trust join Foreign and Colonial in our NZSE40," he says.
"The performance of the NZSE40 would have been a lot better in recent years if more investment trusts were included," he says.
Inclusion of the trust in the index doesn't pose a major problem for index funds as only one of them tracks the NZSE40. More of an issue is that many managers have the NZSE40 as their benchmark.
Foreign and Colonial accounts for 1.72% of the NZSE40.
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