The changing face of the FTSE 100

18th September 2012

Five years ago you'd have been investing a decent proportion of your money in banks, which these days have slid off most people's buy lists.

Back in 2007 12% of constituents in the UK's leading share index – the FTSE 100 – were banks, with three of the top ten largest companies in the index made up of HSBC, Royal Bank of Scotland and Barclays.

But five years on from the credit crunch which ruined many banks around the globe, including Northern Rock in the UK, the landscape for investors has shifted, stresses a report in Investment Week today.

Taking a mindful approach to investing

Whether a passive or active investor, as the horizon has shifted significantly since the financial crisis took hold, make sure you know where your money is – and that you're happy with this.

While low-cost passive investing has become a catch phrase for many during this difficult time – to avoid active managers and high charges – looking under the bonnet of your fund is still important.

Passive funds track the performance of a particular market or index, rather than aiming to beat it. They are marketed as a low-cost, transparent option for investors seeking equity exposure. Alternatively, active funds enable managers to pick and choose the stocks.

So how has the passive route changed? Five years on from the collapse and subsequent nationalise of Northern Rock, the banking sector's dominance has diminished, for starters.

Today just one bank – HSBC -remains among the top ten largest in the country, while the total sector index weighting has fallen to 9.8%.

So what are passive investors going for these days?

While banks have suffered, defensive firms – unsurprisingly – have thrived, with the Oil & Gas sector increasing its index weighting from 15.18% in August 2007 to 17.75% today.

In fact, half of the FTSE 100's top ten would be classed as defensive. Vodafone and GlaxoSmithKline, British American Tobacco, Diageo and AstraZeneca are now all top ten members of the FTSE 100 by market cap.

But of course this is to be expected as in a buoyant economic climate, everything does well, but when the economic storm hits, those with the means to batten down the hatches  do well.

So while the Passive vs. Active debate will always rage on, the underlying investments are in constant shift. Yet for every study that proclaims that index funds are better than actively managed funds, there is one that argues that the latter deliver greater value.  

However, one point to bear in mind is that if you choose the passive route you may one day be invested heavily in mining stock, another in banks – depending on the temperature at the time.

The top ten companies in the FTSE100 index five years ago were, in descending order, Royal Dutch Shell; BP; HSBC; Vodafone: GlaxosmithKline; RBS; Anglo American; Rio Tinto; BHP Billiton and Barclays.

Today they are: Royal Dutch Shell; HSBC; Vodafone: BP: GlaxosmithKline; British American Tobacco; BG Group; Diageo; BHP Billiton and AstraZeneca.

Changing global and investment climate

Yet the make-up of the FTSE 100 isn't entirely based on the UK's fortunes. What's going on overseas is also affecting the passive investment route.

Many more FTSE 100 companies – including oil groups Shell, BP, together with multinationals such as British American Tobacco, and Glaxo SmithKline – derive the lion's share of their business overseas.

Qualification for entry into the FTSE 100 depends on stock market capitalisation – at present the lower limit for entry is around the £2 billion mark, rather than where business is derived from. The constituents of this index are reviewed every three months, and as many as 10 companies can be relegated from the list or promoted to it.

As a final word let's turn to Andrew Lyddon, one of the three authors of the Value Perspective Blog. He says: "…  recognise that the outlook for the market is always uncertain, it's just that at times investors are more aware of that fact than at others.

"Today the stock market is acutely aware of the uncertainties and things that might go wrong, whereas back in, say, 2005-2006 everything seemed lovely for investors and people weren't really thinking that the world had the potential to change very quickly.

"If you approach things that way it leads you to focus much more on what you are paying for businesses and how reasonable that is. It should also make you want to ensure that businesses you invest in are financially robust in order to stand up to any future shocks."

So keep a keen eye on your portfolio for a mindful approach, whether you take the passive or active route.

 

More on Mindful Money:

Q&A – Finding value in uncertain markets

The Financialist: Five years on from Northern Rock: Have investors learnt the lessons of 2007?

Survival of the fittest

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30 thoughts on “The changing face of the FTSE 100”

  1. Anonymous says:

    Shaun, Lumping pensioners together is a bit like the housing market stats – some are doing very nicely ( Charlie Bean and the like ) but others have seen real falls and I count myself in that group. A lot depends upon your level of savings and investments as these have taken quite a hit in recent years and, in my case, the income no longer provides enough to live on. There is also the situation where many retired or older folk are having to support children in one way or another and provide help with mortgage deposits. It’s a difficult financial soup to untangle and have precise figures for each group.

    1. Anonymous says:

      Hi pavlaki

      I agree entirely which is why I went through the savings and annuity issues before discussing the IFS numbers. Also I thought that the mainstream media would plug the IFS implied line (check this from the Huffington Post http://www.huffingtonpost.co.uk/2013/06/13/ifs-report-young-people-pensioners_n_3437552.html?utm_hp_ref=tw) so I wanted to provide an alternative and some balance

  2. Andy Zarse says:

    Just the simple mention of Charlie Bean’s name in conjunction with the valuation of his pension was sufficient to raise my blood pressure to dangerous levels! I should have realised that Paul “Mr T” Tucker had almost twice as much! Poor old Charlie, however will he manage? Still, future pay rises, and a bit more time should see him right…

    It would be an interesting excercise if we were to add up the various valuations of the senior folk holding benefits in the BoE Court pension scheme. Anyone got the numbers?

    1. Anonymous says:

      Hi Andy

      The only other active member in addition to the two above is Governor Mervyn King but the Bank of England annual report for does not specify the numbers for him. Here is the link and the scheme starts from page 44.

      http://www.bankofengland.co.uk/publications/Documents/annualreport/2013/2013report.pdf

      The Bank of England pension report is out of date as it is for 2012 but here it is too. http://www.bankofengland.co.uk/about/Documents/humanresources/pensionreport.pdf

      I have to confess I went straight to the index-linked Gilts holdings which were £2.49 billion or 81.9% of the fund.

  3. Justathought says:

    Hi Shaun,

    As much I would argue for a basic descent and “Universal
    “pension regime, I have to support the thesis of no pension at all in the view of the current realities…

    In my view, the “wealth” producers, creators should have advantages
    over the “non-wealth” producers/creators…we often are seeing the reverse… (Merv’s pension pension’pot (and the likes) is well documented … doesn’t seem to me he was part of the “wealth” producer’s group).

    Not that I would obliterated the old generations however I am fully behind the frustrated youth struggling to make they own living and have to pay the elderlies ‘privileges.

    1. Anonymous says:

      As we, the current generation of pensioners, paid for the previous generations benefits when earning a salary. Unfortunately our pension plan is a ponzi scheme unlike say Norway where it is fully funded.

      1. anteos says:

        I dread to think what will happen in 20 – 30 years time, when my generation retire. Due to high house prices and inflation, most people are not saving for a pension. They will retire with tiny pensions and yet see public sector workers with gold plated ones. This will be a very divisive issue.

        1. Anonymous says:

          Quite a lot of them will inherit substantial capital built up by their parents – particularly in housing. If inheritance tax were to be scrapped then the transfer would be more predictable and valuable. It would mean that a few very rich would benefit as well but that is a small price to pay to help today’s working young.

          1. Anonymous says:

            This line is trotted out over and over. Most won’t inherit much. If they do they will be old by then. The “worth” of housing will not be realised as the number trying to sell up at the same time (due to demographics) dwarfs the number entering the market. Mix in the decline of the NHS and care costs and I bet you will be left holding a lawn sale of false teeth to make ends meet.

          2. forbin says:

            welcome back progrock!

            I agree , housing prices are the issue !

            Forbin, Mr 2%

            Popcorn – yum!

  4. James says:

    It is obviously dangerous to lump all pensioners together, but I am amazed that there isn’t more anger among the young. Just ignoring the income side for a moment:

    1. Pensioners were able to buy houses at much lower rates and have now accumulated capital wealth

    2. Pensioners saved up and are getting pensions based on life expectancy of c65 years and are now living another 20 years
    3. The free things for pensioners need to be added to the deal. Not just the TV licence and winter fuel, but free bus passes and especially free healthcare which is disproportionately used by the older generation.
    And the young? Well, they have to borrow for university, borrow vast amounts to buy tiny properties and then are expected to save for their own retirement…

    1. Noo 2 Economics says:

      Hi James,

      There isn’t more anger (if any) among the young because few are interested in or follow such things. They will know their plight is bad but will not understand that the elderly are doing better.

      Where do these longevity rates come from? My mother is 88 and is the only one of her group left.

      They started dying in their late 60’s with the majority dying in their mid 70’s, yet we hear stories of average mortality rates of 85. Where? When?

    2. Midge says:

      Hi James Agree with your comments about the difficulty of young people be it UK,Spain,Greece or many other countries.Emloyment and apprenticeships are much harder to find than during the elderly’s early days.Pensioners were able to to buy houses at much lower rates.The prices were lower but the interest rates certainly were considerably higher.On the other hand a lot enjoyed the benefits of MIRAS.Young people who go to university are saddled with large debts but not many of the ‘baby-boombers’ had the opportunity of a university education.The free TV licences are for the over 75’s only and the winter fuel allowance as been reduced.These things were promised for the life of this parliament only and are likely to disappear in a couple of years.Yes the elderly lived in a time of high inflation and perhaps the best time to be in the stockmarket but missed out on other things.University education,technolgy and foreign travel to name a few.I believe the elderly are property rich but not in cash or experiences in life.Has already mentioned by others it is unlikely that the elderly will sell up and travel the world but leave the property to the kids and grandchildren.

    3. Anonymous says:

      Hi James

      It is the “borrow for university” bit aka student loans which really gets me. If I look at my own circumstances my time at the LSE was paid for if I recall correctly via the council was the system and I got a grant although I was at the time they shrank substantially. Now we are supposedly so much wealthier and yet students have to pay.

      It is a topic all of its own I think as something has gone very wrong here and current and future students are paying the price. I suspect the expansion in university students has played its role and wonder if that was a public relations success but an operational failure.

      1. Anonymous says:

        agree

        by the way I used to be jan but now get no choice and have to be janchild whether I like it or not!

  5. Rods says:

    Hi Shaun,

    A good interesting blog.

    I think the gap between private and public pension provision will continue to widen as more and more final salary schemes have closed to new members in the private sector.

    I agree that for the youth in the UK looking for their first job is much more challenging than it has been for along time. The key has always been and will continue to be, to have in demand skills. I don’t think you will find many unemployed engineering or IT graduates. In fact looking at a few vacancies for recent IT graduates, starting pay seems to be £20-30k outside of London and £23-33k within London!

    One massive difference between the youth and retired generations is that the young have it all to play for, for the next 45 to 50 years, whereas once somebody has fully retired and bought an annuity they can’t add to their resources. Even if they wanted to work again health and family commitments (many grandparents are childminders while their children work) may well preclude it.

    1. Anonymous says:

      Hi Rods

      I think that the IFS analysis begged as many questions as it answered. As you point out a breakdown of the pensioner population would be likely to show some very disparate groups. For example between the Beans,Kings and Tuckers and those just on a basic state pension.

  6. Noo 2 Economics says:

    Hi Shaun,
    It’s been the case for at least 40 years that pensioner’s benefits were inflation proofed (with the exception of Xmas bonus) whilst those on final salary occupational pensions also enjoyed inflation proofing.

    I don’t see anything new here re pensioners except I wonder how their lot actually improved. May be it was Winter fuel payments and increasing personal tax allowances? But then, the rest of the population benefited from personal allowance increases too. Perhaps account has been taken of “in kind benefits” like free travel on public transport nationally and free TV licences for the over 80’s etc.

    The “triple lock” looks set to continue to inflation proof pensioners finances although there is the problem of which inflation measure the Government uses.

    I believe this position willl gradually unwind over the years as pensioners on inflation proofed final salary pensions die and are replaced by the current crop of personal pension annuities, then a new problem will arise of how to stop them from falling into the poverty trap and qualifying for welfare benefits to top up their income to a subsistence amount – all thanks to QE destroying yields and hence annuities (and how they intend to unwind QE I haven’t a clue – I don’t think they have either!). I don’t think the BOE or Government has even thought to look that far down the road.

    Let’s not get the current positioon out of proportion though – most pensioners start from a very low income base with the majority of their capital locked up in their homes, so it’s not as if they are awash with cash!

    1. Justathought says:

      Hi Noo 2,

      I am afraid that even capital locked into house might just be a mere “belief”; who is to say in 20 years’ time that a personal house would
      be of some capital?

      1. Noo 2 Economics says:

        Very good point – I agree.

  7. Anonymous says:

    “They have used relative rather than absolute data. So whilst the pensioner age group may have seen some relative improvement in their income circumstances they remain a group which overall has a lower income than the average for the population.”

    Great topic. Sean – it’s *all* about housing. Pensioners might have a lower income but for the young a massive wedge goes on putting a roof over their head.

    IMHO there is an iceburg being built by our government, and the youth income change is the tip of it. Under this we have:

    * massive debt from university
    * even more debt from housing
    * little or no pension saving

    All of these are being pushed into the future by debt, ignorance and “heads in the sand”. The effect is going to be huge.

    I’d also add that a lot of final salary schemes are based on absurd assumptions of 6% compound growth. Reality has drifted from this somewhat! Given the collapsing support ratio this is dire indeed.

    Finally, I’m amazed the youth haven’t kicked off. Only poor financial education is stopping it. Many pensioners are very well off and the current youth will only see that they will not be kept in such style. They will not be happy but it will be too late to dig up and try the present lot.

    1. forbin says:

      as state else where , those pensioners are a mixed bunch and those that are “well off” are including their housing.

      As housing prices are the cause of the issue , then if corrected these pensioners will not be “well off ”

      The economic situation is simple – houses cost too much!

      ( short Supply cannot be made up with finite land availability – I suggest reducing demand …… not gonna happen)

      Forbin

      1. Anonymous says:

        I’d also say that if house prices corrected a lot of the boomers would be utterly stuffed. IMHO the political class are trying to delay the offset of the lack of pension provision amongst this generation by propping up house prices. The cost of this is an even greater pension crisis in the next generation – but hey, that’s four electoral cycles away. Who cares??

        Demand will reduce when interest rates go up. When rates rise leverage decreases. Mortgages are the only access regular people in the UK have to leveraged debt. This is why they love it. Once that ends and people make money by doing actual work again then it all turns. Because we presently have the opposite (no point in working hard, just get a huge mortgage), until rates rise the UK will continue to languish.

        Basically the UK has painted itself into a corner. We know what we need to do long-term but if we pursue it in the short-term meltdown will occur. IMHO it’s past the point of no return, once you mix in demographics and a marked shift in sentiment on immigration.

    2. Anonymous says:

      Hi progrock

      It seems that the young are being loaded up with debt does it not? That is a clear trend change and if we return to medieval imagery it does provoke thoughts of a type of serfdom.

      However if we think of where one might expect the youth to kick off first then Thursdays data from Greece settles it I think.

      “By observing the unemployment rate for different age groups, we notice that the highest unemployment rate is recorded among young people in the age group of 15-24 years (60.0%). For young females, the unemployment rate is 66.3%”

      1. Anonymous says:

        It’s such a mess. I think there will be unrest in Europe first and then across the channel. People just need the spark to realise that it’s policing by consent, and if you don’t consent, well…

        It is serfdom. My preferred phrase is “generational apartheid”. It’s disgusting and the olds don’t care one jot. Many think the young are lazy, just as “blacks” would have been told in years gone by.

      2. Anonymous says:

        Sean I think you have a fan:

        http://www.thetimes.co.uk/tto/opinion/columnists/article3791724.ece

        For me this has been on the cards for a while. Once it’s out the box it will get out of hand pretty quick.

  8. Justathought says:

    I believe the estimates suggest that the US needs to raise all taxes by
    about 64% in order to be able to support its older population. That’s
    raising payroll, capital, dividends and income taxes by 64%. The other
    option is to cut all government spending by 40%. Neither one is a viable
    option and a combination is not easy either. In 20 years, those numbers
    will become even tougher. The US will need to raise taxes by 75% or cut
    spending by 46%….Extract from Stan Druckenmiller’ interview

    http://www.zerohedge.com/news/2013-06-14/stanley-druckenmiller-chinas-future-and-investing-new-normal

  9. Anonymous says:

    Hi Shaun,

    The UK pension scheme is a ponzi scheme, and given the UK’s deficit and debts it seems unwise to rely on this for a future retirement income.

    The UK also redistributes much wealth from the productive to the non-productive. Look at the huge salaries given to council leaders, useless quangos etc. Look at the huge monies given to failing bankers. Look at the costs of having an underclass who live on welfare. The current trajectory of printing and debasement points to a financial melt down. I don’t see any British politicians with the bravery and wisdom to take on the vested interests and implement cuts harsh enough to prevent this, but it can be done as Canada proved.

    At least the productive young have the option of emigrating to greener pastures ….

    1. Anonymous says:

      Hi Expat

      Yes whatever happened to “the bonfire of the Quangos”? When many of these bodies are tested such as the FSA (both of them as in horsemeat and Liebor) they are found wanting…

      As to the pension ponzi scheme on start to reform would be to incorporate National Insurance into the Income Tax system. We would then end the implied view that an investment for the future is being made and also be more transparent about how income is taxed.

  10. James_Long_Gon says:

    Expat in BG

    “At least the productive young have the option of emigrating to greener pastures ….”

    Indeed they do Expat. The young today are far better traveled than we were at their age, they get to see and compare the world before putting down roots. A few years ago, before the GFC, I moved my family and productive young to Australia, more for political than economic reasons to be honest. There are huge numbers of young, qualified, able, energetic young people from Western Europe here. The very people Europe can least afford to lose out of its 1.4 kids per family. I might add there are many similar Asians too, probably more. Similar is the operative word here. This brain drain is utterly ruinous for GB, I’m sad to say that I see no solution, I dearly hope I am wrong. There is more of course, you know what I mean, but we don’t do politics on Shaun’s blog.

    The young have every reason the be very aggrieved indeed, that my generation lived way beyond its means by borrowing umpteen billions, frittering it away and leaving them to pay it back. Like inheriting enormous debts from your late father. Not to mention tossing out free speech, self-determination and a few other things we took for granted as children. Will the young rise up in fury? They may have started, in France a group called Generation Identitaire declared themselves in opposition to the ruling elite and bravely announced their identities. I haven’t heard anything since, maybe there is a media blackout or maybe they have been suppressed. I haven’t looked. I cannot see the present calm continuing indefinitely. I expect the political elite may be feeling a bit twitchy these days and I have no sympathy at all.

    An excellent post Shaun, as usual. Why don’t you have a tip jar? I would happily donate for the privilege of reading one of the best sites on the internet in my opinion.

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