Why invest in the FTSE?Contributor William Meadon
As an all-cap investment trust benchmarked to the FTSE All-Share Index, we decided to overweight the JPMorgan Claverhouse Investment Trust plc to large-cap stocks in 2016 in the aftermath of the Brexit vote.
With Brexit came a very sharp fall in sterling: with large-cap companies deriving on average 70% (J.P. Morgan Asset Management Q1 2019) of their earnings from overseas, these businesses were well-placed to enjoy the benefits of sterling’s weakness when bringing their profits back into the UK.
We take a high-conviction approach when selecting the trust’s portfolio of 60 to 80 stocks, and being overweight to large-caps means we invest heavily in the FTSE 100, which comprises the 100 companies listed on the London Stock Exchange with the highest market capitalisation.
There is a common misconception that investing in the FTSE 100 and FTSE All Share is equivalent to investing in the UK economy itself. But this is categorically not the case.
In reality, the UK stock market is the most global of developed market indexes, providing investors with huge international exposure. For example, the FTSE All Share’s revenue split as at January 31 this year showed that the UK only accounted for 28% of its total coverage. Emerging Markets made up 23%, closely followed by North America with 22%, while Europe ex-UK accounting for 14% of its income.
It may well be an accident of history that huge international conglomerates such as GlaxoSmithKline and Shell are UK listed, but it does mean that investors can essentially buy appealing global equities at knockdown prices.
In addition to offering international exposure, the UK stock market offers investors a great deal of diversity. It includes larger, well-established companies such as utility providers, oil and gas companies, pharmaceuticals and financial institutions that have mature profit streams, and growth stocks, which are typically younger firms that will reinvest profits in growing the business.
At Claverhouse, we actively seek out income-generating UK companies. Our dedicated UK equity specialist team invests in a focused portfolio, with an emphasis on quality UK stocks that can provide consistent and growing dividends.
And the UK stock market is particularly dividend friendly. In fact, it’s arguably one of the best in the world, with a dividend pay-out of 62% and yield of 5.2%1 as of January 24, rivalled only by commodity-driven Australia and sanctions-threatened Russia. Of course past performance is not a reliable indicator of current and future performance.
One thing that investors should be aware of is the detrimental effect dropping out of the market, even for a short space of time, can have on stock market investments.
J.P. Morgan Asset Management research shows that the value of £10,000 invested in the FTSE All Share from 1999 to 2018 would provide an annualised total return of 5.1% to those who remained fully invested. However, those that missed the ten best market days only received a 1.7% return, while those that missed the best 50 would actually have seen the value of their investment drop by 5.1%.