Beware folly of the FTSE 100 warns DFM

Beware folly of the FTSE 100 warns DFM

Clients in ostensibly UK-based passive funds will have seen much of the worst China and commodities volatility in recent months, due to a misapprehension around the way the FTSE 100 is constructed.

Nicholas Spicer, portfolio manager at discretionary manager Portfoliometrix, told FTAdviser while the UK economy has been performing better than expected in 2015, the nation’s best known index is down almost 5 per cent this year to the end of September, including dividends.

“The key here is the misapprehension that the FTSE 100, being an index of UK-listed companies, must therefore be reasonably directly linked to the UK economy,” he stated, adding that such an assumption would have led to unexpected and quite negative consequences this year, as it ignores some of the other key drivers of the index.

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“Advisers would have discovered this year that clients invested in a FTSE 100 tracker were perhaps overexposed to commodity companies and thus to China and oil worries - over 20 per cent of the market cap of the FTSE 100 prior to oil’s crash was resource companies - and also had a high degree of exposure to poorly performing emerging markets in general - about 16 per cent of FTSE 100 revenues come from emerging markets.”

Mr Spicer also noted that almost 25 per cent of the market cap is made up of just the top five names, two of those being energy companies BP and Shell.

Instead, he suggested that advisers would have done far better to have realised that the FTSE 250 is far more domestically exposed, including these companies as part of a diversified portfolio.

“Year to date the FTSE 250 has risen almost 6 per cent, including dividends – a more than 10 per cent outperformance over the FTSE 100.”

Man GLG Undervalued Assets fund manager Henry Dixon told FTAdviser sister title Investment Adviser last month that viable UK equity investments remain few and far between, in spite of the recent market sell-off.

Notwithstanding the 12 per cent drop suffered by the FTSE 100 between April and August, the manager said the index had been getting “progressively more expensive” in recent years, particularly as company profitability had stuttered in the period.

Investors were jittery throughout September, with the FTSE 100 falling below 6,000 points as commodity names, including trader Glencore suffered heavy falls, on the back of persistent concerns about a Chinese slowdown.

Mr Spicer said that the recurring theme around tracker funds was there hidden costs and concentration issues, adding that the FTSE 100 is familiar to most, but few actually understand the details.

“Clients will directly attribute seeing a 10 per cent fall in the stock market to the performance of their own portfolio, so presuming you don’t have them completely exposed to the FTSE 100, the best thing to do is communicate how active management or diversification strategies mean those losses don’t translate to their holdings.”