Transformation of the FTSE 100

Having peaked at 7,103 on 27th April 2015, the FTSE 100, the leading UK share index, fell as low as 5,536 earlier this month – a drop of 22%. It has since risen slightly and, at the time of writing, is around the 6,000 mark.

It's been a rough few months for investors in the UK's top 100 companies. We often hear about these firms collectively, but which ones are they exactly?

I came across a great slide from Franklin Templeton Investments a few weeks ago, which showed how much the make up of the UK's top 100 companies has changed over the past eight years. I've recreated the changes below.

As you can see, the big difference today is in the Oil & Gas and Basic Resources sectors. Back in 2007, between them they accounted for over 30% of the FTSE 100 index. By 2015, they accounted for just 16%. Banks have also seen their dominace fall – but only by three percentage points. They are now the largest sector in the FTSE 100.

The real winner in the intervening period has been those companies in the personal & household goods sector – the companies that benefit from consumers' spending. Their presence has risen from 4.66% to 12.98%. Quite a meteoric rise.

However, it's the dominance of certain sectors and companies in an index, that always puts me off buying a tracker fund – a fund that tracks or replicates a stock market. Why?

Well in 2007, as the global financial crisis began, would you have wanted almost 17% of your portfolio in banking stocks? Would you want 13% today when the sector is coming under pressure once again? Oil looked good to be fair – at least for a year or so when the price per barrel rose from $100 to $150, but it has fallen to $30 today.

And who would have thought that the consumer would do so well amidst all the talk of a triple-dip recession throughout 2008 - 2013? You really wanted a higher weighting to consumer-related stocks back in 2007 – not today.

To me, the index is yesterday's winners. I want to find tomorrow's winners. That's why I've always preferred actively-managed funds. You at least have the opportunity to see your investment do better than the market (a tracker fund will, at best, always be the market minus its charge) and your fund manager can own a lot less, if any, of a sector or company if they don't like the outlook.

For example, from the end of 2007 to the end of 2015, the FTSE 100 is up 40% (with dividends reinvested). Liontrust Special Situations, one of my favourite UK equity funds, is up 155%. Granted, it can invest in Uk companies outside of the top 100, but that's my point – aren't the good, smaller companies of today, the big companies of the future?

By Darius McDermott, managing director, Chelsea

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
Published on 25/02/2016