Should you invest in the FTSE 100 or FTSE 250?

This article is part of
Guide to UK Equities

Should you invest in the FTSE 100 or FTSE 250?

After the government pushed so hard to leave the EU by October 31, it now looks like there will be a delay, with ministers waiting to hear from Brussels.

With so much uncertainty, it can be difficult for investors to understand whether their investments might be better sheltered from any downside by being skewed towards either domestic stocks that earn their revenues largely from overseas, or those which rely more heavily on the UK market to derive their revenues.

FTSE 100 companies derive approximately two-thirds, or around 70 per cent, of revenues from overseas, while for the FTSE 250 50 per cent of revenues originate from outside the UK.

In terms of the types of companies typically found in either index, the FTSE 100 is full of mining stocks, oil majors, pharmaceuticals, tobacco companies and banks, while the FTSE 250 will give you a broader opportunity, according to Adrian Lowcock, head of personal investing at Willis Owen.

He adds: “The FTSE 250 is also a mixture of companies growing that are perhaps destined for the FTSE 100, but also those that have fallen out – for example, Marks & Spencer – as well as businesses that don’t seem to change value.”

The largest mega-cap 30 companies in the FTSE 100 are truly global businesses, says Colin McLean, managing director of SVM Asset Management.

“But at the lower end of the FTSE 100, and in the medium-sized firms of the FTSE 250, business is more domestic UK, in sectors such as retail and housebuilding. All but the largest investment managers tend to focus their research and portfolio focus away from the mega-caps.”

What does this mean when it comes to Brexit?

A spokesman from JPMorgan Asset Management explains: “This means the FTSE 250 is more sensitive to Brexit news flow and this has been visible in the market [recently].”

Among active managers performance will be largely determined by stock selection, he adds, which means that investors need to understand what stocks are held in the portfolios they are invested in.

The size of those companies will also impact on performance.

“Funds with a large allocation to the smallest companies are likely to have struggled as sentiment has deteriorated this year,” points out Alex Moore, head of collectives research at Rathbones.

“However, an outcome that would see investors take a more constructive perspective on UK GDP could see such funds benefit from improved sentiment.

“As the UK political saga rumbles on, investors need to be mindful about the short to medium-term impact any Brexit deal with have on their investments in UK equities and collectives.”

Mr Moore notes that this is a challenge, given that funds are often a blend of companies whose performance could be materially impacted by Brexit, positive and negative.

Hardest hit

In terms of specific funds, Mr Lowcock explains: “There are the more domestically-focused funds, such as Invesco Income and Merian UK Alpha, which are positioned for Brexit impact being minimal but are therefore dependent on a resolution one way or another.