This record run is phenomenal. It is not just the US shares of the Magnificent Seven that have risen significantly this year. Germany is also home to SAP, a big tech company of global renown. The share price of the German company Microsoft, which specialises in business software, has risen by around 60% so far this year, clearly outperforming the Dax 40, which has only gained around 15%.

Which brings us to the problem. In order to keep SAP in the Dax, Deutsche Börse raised the weighting cap for an individual stock from 10% to 15% with effect from March. But SAP has now also exceeded this threshold, and currently has a Dax weighting of just under 17%. SAP shares are therefore at risk of being capped at 15% in December. Index funds that track the Dax would then have to sell SAP shares, which could put pressure on the share price.

Against this backdrop, Deutsche Börse and the German financial centre are in commotion. This is because Linde, previously the largest Dax stock, already left the leading German index in March 2023 – due to the cap. The concern now is that SAP could leave. „That would be bad, without SAP you can forget about Germany as a financial centre,“ is one comment heard in financial market circles. „Unfortunately, SAP is the only software company from Germany that has made it internationally and is a major global player. In this respect, SAP is unique.“

But is SAP actually likely to leave the Dax – is the danger real? SAP makes no secret of the fact that – like other big tech companies – it is primarily trying to persuade large investors from the USA to buy into the share with large tickets. These investors cannot be made to think that pressure on the share will arise due to a weighting cap in the Dax, or due to the regulation of European Ucits funds. SAP is, therefore, also in talks with Deutsche Börse.

As a German company, the Walldorf-based software group is naturally not included in the leading US index S&P 500. In the USA, SAP is not listed on the Nasdaq technology exchange, but on the Nyse. Consequently, the SAP share is also not represented in the well-known technology index Nasdaq 100. Both of these are somewhat of a disadvantage for a tech company that wants to increase its market capitalisation, and move in the direction of other large tech companies.

Deutsche Börse reportedly wants to do everything it can to keep SAP in its leading index. According to reports, politicians, i.e. the German government, are also very interested in SAP remaining listed on Deutsche Börse, and be included in the Dax. Berlin is well informed and involved, it is said, right up to the Chancellor.

However, the problem goes beyond the capping of SAP shares in the Dax. ISS Stoxx, a subsidiary of Deutsche Börse, emphasised in a statement that only 15.6 billion euros are currently held in Dax ETFs. This is less than 1.3% of the free-float market capitalisation of the Dax. Therefore, capping the SAP share at 15% would not have a significant effect.

„In our opinion, a much greater influence comes from certain European regulations for investments,“ says ISS Stoxx. At 1.94% of the free-float market capitalisation of the Dax, active funds based on German blue chips account for considerably more than the Dax ETFs. However, according to the EU regulation for retail investment funds (Ucits), active funds may invest a maximum of 10% of fund assets in the shares of a single company. This constitutes unequal treatment compared to Ucits index ETFs. This is because the latter may invest a maximum of 20% in a single share. This regulatory imbalance should be eliminated as quickly as possible. Funds focussing on German shares, such as the Deka fund or Uni Deutschland, are currently allowed to invest a maximum of 10% in SAP shares. As the SAP share is currently taking off and currently has a weighting of 17% in the Dax (though it would be capped at 15% in December), the underperformance of these funds compared to the Dax is almost inevitable.

A few weeks ago, Deutsche Börse issued a statement to the European Securities and Markets Authority (ESMA) pointing out the negative consequences of the 10% Ucits rule, and the discrepancy with the 20% rule for Ucits ETFs. According to the stock exchange, there are „no plausible reasons“ why the limit for a single share should not be further adjusted in the direction of the 20% that already applies to ETFs. Active funds could then also invest up to 20% in a share. However, the Ucits regulations cannot be changed so easily. This would require a change in the law at EU level.

Two measures would, therefore, be necessary to help prevent SAP from after all turning its back on the Dax: Adapting the Ucits rules to the regulations for ETFs and also raising the cap on the Dax to 20%, but this could only be done after prior consultation with market participants. The fund industry is not in favour of any of these measures. „Union Investment was strictly opposed to raising the cap to 15%, as this would significantly distort competition for actively managed funds,“ explains Benjardin Gärtner, Head of Equity Fund Management at Union Investment. „Accordingly, we also reject further increases.“

The fund association BVI is also against raising the cap. „The delisting of Linde was alarming and is a reason to think about how to strengthen Frankfurt as a financial centre. However, a further increase in the cap on the Dax will not make the market more attractive. This has been shown by the example of the T-Share. With a temporary weighting of 20% during the dotcom crisis, it dragged down the Dax,“ said a BVI spokesperson. „Financial indices should be broadly diversified so that active asset managers can invest in as many components of a financial index as possible. In this respect, the investment limits set out in the German Investment Code and the EU Ucits Directive are the starting point.“

The situation is not simple, since the argument that an „overweight“ stock can also harm the Dax cannot be dismissed out of hand. However, the regulatory imbalance in the Ucits guidelines should be eliminated in any case. Raising the limit for individual investments to 20% would also make sense for active managers.