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The harder they fall – the decline of the FTSE 100

One of the big stories on the UK stock market in recent years has been the astonishing performance of medium-sized companies, and the relative decline of their larger counterparts. The FTSE 100, made up of the largest 100 companies on the London Stock Exchange, has risen by 90% over the last five years. However, this pales in comparison with mid-cap companies. The FTSE 250, which is comprised of the 250 largest companies outside the FTSE 100, is up 154%.

Tom White Tom White
07 July 2014

Such has been the disparity that the FTSE 250 has earned the nickname the “Winner's index”, seen as being made up of the fast growing companies of the future. Meanwhile the 100 is seen as big and boring, filled with companies of the past that are too stodgy and bureaucratic to grow further.  But how true is this - are large companies finished?

What is a large company?

It depends what you mean by a large company. Taking the top 100 companies is a highly arbitrary boundary. The largest company in the FTSE 100, HSBC, is 41 times the size of the smallest, Melrose Industries. And Melrose differs from the largest company in the FTSE 250, Direct Line, because one is an investment company and the other an insurer not because of the minor difference in their market values.

The amount of index funds following the FTSE 100 means share prices can to an extent move in step, but this is increasingly the case with the FTSE 250 as well. And many trackers follow the broader FTSE All-Share index, which encompasses the FTSE 100, FTSE 250 and small caps.

Differences to smaller companies

There are some generalisations you can make about companies based on size. Larger companies are typically more international. In a globalised world, even the smallest companies can feed off the power of the internet and serve markets globally. However, the largest companies are often multinationals that just happen to be listed in or based in the UK. FTSE 100 companies derive on average just 30% of revenues from the UK. This compares to 50% for the FTSE 250 and 60% for small caps.

As a result, larger companies have suffered more as a result of the Eurozone crisis and the slowing of growth in emerging markets in recent years. Meanwhile, mid-sized companies have been benefiting more from the bounceback in the UK’s economy. However, the supremacy of mid caps is not just a recent phenomenon – the FTSE 250 is up 246% over the last 10 years, way ahead of the FTSE 100 at 117%. Larger companies haven’t done consistently better than medium-sized ones since the 1990s, when the FTSE 100 was sent soaring by an up-and-coming telecoms company called Vodafone.

Drilling down to the individual companies in the FTSE 100, it’s those towards the top that have typically done worse. Because of the concentration at the top end – just 20 companies make up almost half the value of the UK market - these companies have dragged the performance of the whole index down, creating a misleading impression of its overall health. Many of the companies towards the bottom of the FTSE 100 have been as dynamic as their mid cap brethren.

Problem industries

Even at the top end of the FTSE 100 the likes of British American Tobacco and brewer SABMiller have still performed strongly, so it’s not just size that’s the problem. The industry backdrop is key.

Many of the worst performers are banks, hard hit by the 2008 financial crisis and still struggling to recover. Barclays and HSBC have barely grown over the last five years, whilst Lloyds and Royal Bank of Scotland have shrunk under partial Government ownership. Alliance & Leicester, Bradford & Bingley and Northern Rock no longer exist as separate entities.

More recently oil & gas stocks have been hard hit. BP slumped following the Gulf of Mexico spill in 2010 and has on-going legal problems, but the industry’s issues are wider - Shell’s share price has also been languishing. New reserves are increasingly difficult and expensive to find and there is a question mark over whether they will ultimately be profitable, even at current oil prices. The rise of alternative energy sources also casts a shadow over the industry’s future.

The mining sector has also been hit in recent years, as the commodity boom has turned to bust. High prices prompted investment in new capacity, leading to a dramatic increase in supply, whilst the slowing of emerging market growth, particularly China, has dampened demand. Over the last three years mining stocks are down 28% whilst the UK market is up 29%.

Conclusion

Larger companies are currently cheaper, but perhaps cheaper for a reason. Almost half of the FTSE 100 index is made up of financials, oil & gas and mining companies, industries with genuine issues that might impose a continued drag on their growth – given increased regulation will banks ever regain the profitability of the boom years? However, larger companies are also higher yielding and typically more resilient in a downturn, so they do have a place in portfolios.

Investment ideas

We continue to suggest clients invest in companies of all sizes, though compared to the market our asset models have a bias to medium and small sized companies. While funds perform differently to indices, our Premier Selection list of rated funds includes companies of all sizes. To access UK companies of different market capitalisations we highlight:

Large-sized UK company focus

Fidelity Moneybuilder Dividend

 

Medium-sized UK company focus

AXA Framlington UK Mid Cap

 

Small-sized UK company focus

Old Mutual UK Smaller Companies

 

Focus on UK companies of all sizes

Liontrust Special Situations

 

Nobody knows for sure which the market will favour next, so your portfolio should be ready whichever way it turns.

Focus on UK companies of all sizes

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.  Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. This article does not constitute personal advice. Funds may carry different levels of risk depending on the industry sector(s) in which they invest.  You should ensure that you understand the nature of any fund before you invest in it. Smaller companies shares can be more volatile and less liquid than larger company shares, so smaller companies funds can carry more risk.