The FTSE 100

 

The FTSE 100 – the “Footsie” – is the UK stock market index which garners most of the headlines. It was launched on 31 December 1983 with a base value of 1,000. Today it is about 7,550, which equates to an average annual return (excluding dividends) of 6.2%.  RPI inflation over the same period averaged 3.5% a year.

Two years after the FTSE 100 was launched, the FTSE 250 came on the scene to cover the 250 UK listed shares below the Footsie’s 100 large cap constituents. The FTSE 250’s base figure was 1,412.60, a number chosen to match the level of the FTSE 100 at the end of 1985. Last week the FTSE 250 broke through the 20,000 level for the first time.

What looks like a massive outperformance, is not quite so great when subjected to the power of compound interest. The average annual return (again excluding dividends) comes to 8.8% whereas the Footsie over the same period achieved 5.5% (those first two pre-FTSE 250 years were good ones). Inflation from the end of 1985 comes in virtually unchanged at an average of 3.4%.

The outperformance of the FTSE 250 is not quite as great as it seems because the constituents of the FTSE 100 have generally delivered a higher dividend yield (the FTSE 100 currently yields 3.66% whereas the FTSE 250 offers 2.64%). However, overall there is no denying that the FTSE 250 has trounced its larger counterpart. Look at the long-term graphs and the outperformance turns out to be something of a roller coaster:

Some of the difference in performance is down to the different companies in the two indices. For example, the FTSE 100 has suffered from its exposure to commodities and energy (18.1% against 6.8% currently). A sector breakdown of the industrial sectors of the two indices can be found here. There may also be an effect that, as the top index, the Footsie’s constituents can look like companies that have reached the end of the small/medium company growth stages. 

Comment

The graphs can be rather misleading. Unless they are log-scale, a jump from 10,000 to 20,000 looks much more impressive than 3,500 to 7,000, even though both represent a doubling. On a price/earnings ratio basis the FTSE 100 is more expensive (30.04 v 22.46), but that is largely because the figures are historic, capturing the miserable performance of that all-important commodity sector in the last financial year. In terms of five-year volatility, the two indices were identical to the end of April according to FTSE Russell.

Whether or not you view the FTSE 250 to be in bubble territory, its progress since 2009 is a useful reminder that there has been plenty of scope to outperform the main market index.

For more information on the FTSE 100 or any other Financial Planning queries please call 01793 771093