Monday, 3 March 2014

Footsie reaches for the 7000 mark. But there are better places for your money!

A lot has been made in recent days of the fact that the iconic FTSE-100 index (that has existed since 1986) is close to breaking its 14-year high, reached during the technology bubble back in early 2000.

Will the Footsie break through to a new multi-decade high? How much further can it go if it does? These questions are all well and good, but are not really the right questions to be asking.

In the Stock Market, Size is not Everything!

Should you even be looking at the benchmark FTSE-100 index at all? The real value creation in the UK stock market has not been in these largest of companies, dominated over time by Banks, Telecoms companies and Oil majors. Instead, investors have been far better served by the mid- and small-cap segments of the UK market, not only over the past 14 years but even further back as well.
Including reinvested dividends over time, the FTSE-100 has given investors a mere 3.7% on average since the end of 1999 (the line in black on the chart – and that’s not counting management fees even in an index fund); compare this to the 6.5% pre-fees from the Small-Cap index (in green) and an impressive 10.2% pre-fees from the Mid-250 index (in red), nearly three times the average return from large-caps!

This was largely achieved through two key biases:

1. A bias towards domestic economic exposure, which is greater in the mid- and small-cap segments of the stock market. In contrast, FTSE-100 companies tend to be global by nature, and indeed often have little to do with the UK per se (look at the Miners, for example).

2. Low weightings in hard-hit sectors, such as Banks, Insurance, Telecoms and Oil Majors. All of which have come a cropper either during the recent Financial Crisis, or before that post the 1999-2000 Tech bubble.

3. Let us not forget either that smaller companies generally also post higher growth rates in sales and profits too…

Despite this superior performance record for mid- and small-caps, you can’t even make the argument that mid- and small-cap companies are now systematically over-valued with respect to their large-cap counterparts: the estimated Price/Earnings ratio for the FTSE 100 is a little lower than for the Mid 250 index at 12.5x versus 14.6x, but it is not as low as for UK Small Caps, which trade at only 11x estimated end-2014 profit.

To see the charts, and look at the ETF and investment trust selections that I think will beat the FTSE-100 going forwards, please click on the Mindful Money web link below:

Until the next time,Edmund

1 comment:

  1. Don’t try to beat the market, he said, and don’t believe anyone who tells you they can not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund.