FTSE 100 celebrates 40th birthday – but is it over the hill?

by | Jan 2, 2024

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  • FTSE 100 hits its 40th birthday this week, on 3 January
  • 40 year returns are behind European and US peers
  • Things look even worse since the turn of the century…
  • …but the Footsie’s 21st century travails are somewhat of a mirage conjured by currency and the exclusion of dividends
  • How to invest in the FTSE 100

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“As the FTSE 100 celebrates its 40th birthday, the UK stock market finds itself in a quagmire of existential angst. The headline index has made almost no progress since the start of the century, and in the last decade the Footsie has been totally eclipsed by the US stock market, which is winning company listings and financial flows. Since 2016, domestic investors have been relentlessly selling UK equity funds in favour of more global offerings, no doubt driven in part by better performance from overseas equities.

“UK stocks now make up just 4% of the global developed stock market, down from 10% a little over a decade ago. That’s less than the amount made up by Apple or Microsoft individually, and is a small enough fraction of the MSCI World Index that global fund managers could happily turn a blind eye towards the UK without taking too much risk against their benchmark. And in recent years, they would have almost certainly been rewarded for doing so with improved performance. Of course, the more people divesting from the UK and the fewer investing fresh funds in it, the less relevant it becomes on the global stage, potentially creating a vicious downward spiral.”

 
 

FTSE 100 performance in detail

“Looking at historical performance data, it’s hard to avoid the conclusion that the Footsie’s best days are behind it. A 5.2% annualised return since launch in 1983 is already lower than its European and US counterparts, but also belies the fact most of that growth came in the first two decades of the FTSE 100’s existence. An idyllic youth has given way to an austere adulthood for the UK’s headline index. The noughties were a tough decade for all markets, beginning as they did with the tech crash and ending with the financial crisis, so the FTSE 100 can be forgiven for posting a negative capital return over this period. But since 2000, the headline FTSE 100 has festered, while other developed market indices appear to have forged ahead. From the turn of the century the FTSE 100 has risen by just 0.4% a year on average, compared with a 6.1% annualised rise in the value of the S&P 500.”

Annualised price return in GBP %
Since Jan 19841980s*1990s2000s2010s2020sSince Jan 2000
FTSE 1005.215.911.1-1.51.60.50.4
MSCI Europe ex UK7.822.511.90.34.75.22.9
MSCI World7.718.69.6-0.79.58.84.4
S&P 5009.111.615.3-1.113.411.56.1
TOPIX4.633.7-1.7-3.57.11.90.9

*from January 1984

 
 

Source: Morningstar price return in GBP to 26 December 2023

The Footsie’s 21st century flop

“However, a 21st century malaise apparently infecting the UK stock market is somewhat of a mirage, conjured up by weak sterling and the fact dividends are not included in the headline FTSE 100 index. While the FTSE 100 is a good barometer of the day to day movements of UK stocks, it is a wholly inadequate measure of the long-term returns accrued by investors, because it fails to take into account the dividends paid by its members. It has this in common with most headline indices representing global markets. Dividends are of course an important component of the overall returns that are provided to investors, and are especially significant for the Footsie given the established dividend traditions of its constituent companies. 

 
 

“Adding dividends into the mix, the returns of the FTSE 100 this century look much more healthy in absolute terms, though the UK still languishes well behind its US and European counterparts. The FTSE has produced a total return of 4.1% per annum since the turn of the century with dividends reinvested, compared to 5.7% and 8.1% from European and US stock market indices respectively. (Total return data for the FTSE 100 is only available from 1986, two years after the price index was launched). 

 Annualised total return with dividends reinvested
Since January 19861980s*1990s2000s2010s2020sSince Jan 2000
FTSE 1008.619.715.71.95.54.24.1
MSCI Europe Ex UK8.725.213.82.57.37.45.7
MSCI World9.121.011.41.111.710.56.7
S&P 50011.415.918.20.715.713.38.1
TOPIXN/AN/A-0.9-2.29.44.42.7

*from January 1986

Source: Morningstar total return in GBP to 26 December 2023

“Things look better still for the FTSE 100 when you also account for the effect of currency movements. Sterling has weakened considerably since the turn of the century against many key currencies, most pertinently the euro and the dollar. While weaker sterling does help to boost the share prices of FTSE 100 companies due to their international revenue streams, it has an even greater effect on the sterling returns enjoyed by overseas indices because of their even greater exposure to dollars and euros.

“When looking at total returns in local currency, once again with dividends reinvested, the FTSE 100 has actually performed better than both Europe and Japan since 2000, chiselling out a 4.1% annualised return, just ahead of the 3.9% produced by the European stock market. This is probably the best measure to provide a pure performance comparison of the FTSE 100 against its international peers, though it underplays the returns received by UK investors from overseas indices, as a result of the fillip they have enjoyed from weaker sterling. By this metric, the FTSE 100 still sits comfortably behind returns from the global stock market, with the MSCI World returning an annualised 5.6% since 2000. However, this is heavily influenced by the ballooning US stock market, which has generated returns of 7.1% per annum since 2000, and actually appears to be the outlier compared to other markets. It’s true that the FTSE 100 has fallen behind the S&P 500 since the turn of the century, but this looks to owe more to American exceptionalism than UK degeneration.”

Annualised total return (dividends reinvested) in local currency %
 Since January 19861980s*1990s2000s2010s2020sSince Jan 2000
FTSE 100 8.619.715.71.95.54.24.1
MSCI Europe Ex UK 7.412.515.7-0.96.66.13.9
MSCI World 8.119.411.0-0.310.59.95.6
S&P 500 11.017.718.20.414.012.17.1
TOPIX N/AN/A-4.2-4.58.810.63.1

*from January 1986

Source: Morningstar total return in local currency to 26 December 2023

“Even adjusting for currency and dividends, the FTSE 100 has been at the back of the pack in terms of generating returns in the 2010s and 2020s so far. The rise of growth investing and indexing has not been particularly kind to the UK stock market and its collection of old economy stocks like banks, insurance firms and mining companies. The UK does look undervalued compared to the US market, but that has been the case for most of the last 40 years. Contrarian investors might still be tempted to buy UK stocks, though they would need to exercise some patience as a renaissance may not materialise any time soon, given long-standing trends in investment flows which show no sign of abating. The good news is that with a forecast yield of 4.2% for 2024, investors in UK plc are at least being paid to wait for a turnaround in fortunes.”

How to invest in the FTSE 100

“Probably the most straightforward way to invest in the FTSE 100 is to buy a FTSE 100 tracker like the iShares Core FTSE 100 ETF. Active funds investing in the UK don’t limit themselves to the big blue chips of the FTSE 100, with many managers actually preferring to hunt a bit further down the cap scale in the hope of picking out less well recognised companies with greater growth potential. This has been a winning strategy over the long term. Since 2000, the FTSE 250 index of midcap UK companies has returned an annualised 7.7% compared to 4.1% from the FTSE 100, both with dividends reinvested (source: Morningstar). Investors looking for broad all cap exposure to UK stocks might consider Fidelity Special Values or Liontrust UK Growth. Income seekers might consider City of London investment trust which currently offers a yield of 4.9%, or Man GLG Income Professional on a yield of 5.6%.”

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