What’s wrong with the FTSE 100? A report in the weekend Financial Times listed fund managers underweight relative to their benchmark. For quite a long time the Merrill Lynch fund manager survey has had the UK index as one of the favourites to be underweight in. Brexit takes a lot of the blame. However, this was much the case before Brexit was an issue. It is worth remembering the index has only just passed levels reached back in 2000. In 1990 the FTSE 100 stood at 1500, the Dow Jones Industrial index about twice that much. Today the Dow Jones stands at 25000, whilst the FTSE 100 is less than a third of that value. The Dax index of leading German companies stood at 1500 in 1990 and is now over 12000. Over the long term underweight, the FTSE 100 against other indexes would have been a very good idea.
Why is this? Looking at the constituents one could conclude the FTSE 100 is full of very boring companies. Utilities, mining, big oil, a few underperforming banks, insurance companies (Prudential excluded), pharma and a drinks company make up the bulk of the index. All old-world industries. There is little that provides any real growth or alpha, to use the industry term, outside of either the broader global economy or the UK economy. There are no technology stocks, the only one we had was Arm holdings and that was taken over. GKN is the subject of a recent takeover, one area we seem to excel in is creating mid-sized engineering companies that attract the attention of larger ones, often from overseas. Rather reminiscent of a mid-table premier league football club that keeps selling its best players possibly before they reach their true potential.
The UK index gets reweighted every three months to ensure the 100 largest cap stocks represent the index. Often changes are made more because incumbents are shrinking, rather than new entrants are growing. The bulk of the index hardly changes. The smallest company by market capitalization in the FTSE 100 is just over 4 billion pounds. The Dow Jones is nearer 30 billion pounds.
We don’t seem to have the ability or willingness to grow new multinationals, and when we do create an innovative company, it seems to get taken over before it reaches any scale. We don’t appear to have the vision of the Bill Gates or the Mark Zuckerberg’s of this world. Perhaps we don’t have the right capital structure in place, or are business owners just too quick to sell out?
Studying this one can see why investors remain underweight, it has proven to be a wise trade. You can’t really see much changing. For a domestic investor, you have the choice to follow an index that has historically underperformed or invest overseas and take the currency risk. Then again looking at the way Sterling has performed over the past few years perhaps that is not such a bad idea either.