Change is all around

Posted by Liz Rees in Weekly musings category on 30 Jan 19


The FTSE 100 index, which measures the performance of Britain’s leading blue chip companies, celebrates 35 years since its launch this month. I wondered what it might tell us about the type of companies that stand the test of time.

Introduced in 1984, at a base level of 1000, the benchmark contains the 100 largest companies on the London Stock Exchange and is reviewed quarterly. Initially, the combined value of its constituents was around £160 billion, while currently it is over £2 trillion, testimony to the growth of global capital markets. Public interest was awakened in the 1980s, with a spate of privatisations, including BT and BP, which gave individuals the opportunity to invest in the country’s largest businesses.

The changing face of the British economy

The most striking fact is how radically the makeup of the FTSE has changed; some of today’s biggest companies did not even exist three decades ago. Whereas our economy used to be dominated by industrial sectors, such as engineering, chemicals and textiles, these shrunk as our status as a manufacturing nation declined. Areas which have expanded include healthcare and consumer products and services, reflecting demographic changes and leisure trends.

Oil & Gas remains the biggest sector, but will it still be on top in another 25 years, as supplies of some resources dwindle and demand for alternative sources of energy grows? What will the adoption of electric cars mean for oil companies?

Technology didn’t merit a sector designation in 1984 and even now is only around 1% of the index, small fry compared to the US weighting. For some, it is a concern that the UK’s less stringent takeover laws allow some of our ground-breaking tech companies to be gobbled up by overseas predators. Autonomy and ARM, for example, made it into the FTSE 100 but were then acquired by US titan Hewlett Packard and Softbank of Japan respectively.

Another trend has been the growth in overseas earnings as a result of globalisation. Will this be threatened by the rise of populism, or will demand from the new middle classes in emerging markets continue to drive demand for British goods and services? I think our sought-after brands are well placed to benefit as long as they retain their independence.

Meanwhile, the prestige of a London listing attracts companies which mainly operate abroad, such as Russian steel maker Evraz, precious metals miner Fresnillo, and healthcare companies Hikma and NMC. You may be more familiar with some early names that have since fallen out; Allied Lyons, Courtaulds, MFI, Pilkington, Trusthouse Forte and ICI certainly provide a trip down memory lane.

The winner and losers

Less than a third of the original members are still present and, of these, the top 3 performers, on a total returns basis, were BAT, Unilever and Whitbread. Who would have predicted tobacco, soap and beer to be the winning products over the long term! However, what they have in common is ownership of strong and sustainable brands. Management have embraced change, sought new markets and made strategic acquisitions, as well as investing in product development. The resultant strong cash-flows have produced a healthy stream of dividends.

Of course, others will have done better on an annualised basis from the point of joining the blue-chip club. Food delivery tech business Ocado was the top performing stock last year despite have only been founded in 2000. EasyJet and Just Eat also reflect changing lifestyles.

Adapt or die

When companies fall from grace, for whatever reason, this can lead to refinancing, a rescue takeover, delisting or even bankruptcy. Identifying businesses that will survive the test of time, and thrive, is no easy task, even for professional fund managers. 

It is informative to look back at which popular holdings in smaller companies funds thirty years ago made the FTSE 100. Success stories include: Sage, Logica, Next, TUI, Shire, Ashtead, Halma and Microfocus. Today, many widely-held companies with exciting growth potential are listed on the junior AIM market, such as Blue Prism, Fever-Tree and Boohoo.

There will be losers too. A one-time favourite was Johnston Press, a regional publisher of newspapers such as the Yorkshire Post. It led the consolidation of its industry but failed to adapt to the structural shift to online advertising and recently went into administration. Chip designer Imagination Technologies was also once a stock market darling but became over-reliant on Apple and was bought out by a Chinese company.

Where to invest?

If you want to get in early, a good place to start is a smaller companies fund with a growth focus. Unearthing a few long-term winners can more than make up for those that don’t make the grade.

Smaller stocks are less well-researched, giving an opportunity for managers who have a strong grasp of the financials. In addition, proven stock-picking skills, experience through economic cycles, humility and foresight are key. One manager who, I believe, meets these criteria is Dan Nickols, manager of the Merian UK Smaller Companies Fund. If you prefer to target opportunities overseas, you could take a look at SLI Global Smaller Companies.

Smaller companies do carry extra risks, so should be a limited part of a portfolio, complementing funds investing in well-established blue chips. A fund with an impressive record of investing across all companies, irrespective of size, is AXA Framlington UK Selected Opportunities. Its affable manager, Nigel Thomas, is soon to draw a close on a successful 40-year career, handing over to the equally capable Chris St John. So, it might be appropriate to close with one of his favourite sayings: ‘things do not necessarily get better or worse, just different’.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. 

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