The main London Stock Exchange (“LSE”) index is commonly referred to as the “Footsie” and, up until a couple of weeks ago, was being quoted in the press as having hit multi-year highs. The FTSE 100 is made up of the largest one hundred qualifying UK companies, by size or market capitalization. What is less considered is that most of these companies are global businesses, so the FTSE 100 index is potentially a weak indicator of how the UK economy is actually faring.
The FTSE All-Share index is possibly a better UK indicator, as it aggregates the FTSE 100, 250 and SmallCap indices, but the largest 100 companies still make up 81% of this index. The FTSE 250 is the next largest 250 companies, whilst the FTSE SmallCap index is the 351 to 619th largest London listed companies. Also, and often overlooked, is the FTSE Fledgling index, a random mixture of 200 companies not in the FTSE All-Share.
Year to date, the global FTSE 100, FTSE 250 and the FTSE SmallCap indices are all down, on a Total Return (“TR”) basis which includes dividends. If you had been farsighted enough to choose a random FTSE Fledging index you would still be up 8% in 2014. (Fig: 1)
However, the big debate is whether or not where you are listed really matters? Alibaba, who have just listed in New York; HSBC, which is one of the largest LSE constituents, and a very large proportion of the Johannesburg Stock Exchange Top 40 index – who earn more than 50% of their revenue and profits outside of South Africa, are all global by nature.
To illustrate just how global the FTSE 100 index has become, I have used a longer term chart, in sterling terms. (Fig: 2) Whilst there have been periods where the FTSE World index has underperformed, or more recently outperformed, over this 20 year period, there is little diversification or performance benefit nor differentiation.
The moral of the story is that indices and the press can be deceiving. Which can also mean that even buying simple low cost ETFs or index tracking funds requires well thought out advice and portfolio construction processes.
Weekly comment Week 40 2014 - FTSE - SC .pdf
