Investing in the FTSE 100

Darius McDermott 21/09/2021 in UK, Equities

In the investment world, being promoted to the FTSE 100 is the equivalent of reaching the Premier League in football.

It’s the pinnacle of the business world. Firms enjoy elevated kudos by virtue of being among the 100 biggest companies on the London Stock Exchange and individual investors hear more about their exploits due to increased media coverage.

What is the FTSE 100?

The Footsie, as it’s often referred, is regarded as a barometer of UK investing health, even though many of the companies it contains have global business interests.

It’s made up of the 100 largest companies listed on the London Stock Exchange, ranked in order of their market capitalisations. This ‘market cap’ figure is purely mathematical and calculated by multiplying the company’s stock price by the number of shares that it has issued.

The five largest companies in the FTSE 100 currently account for almost 25% of the entire index weighting, according to FTSE Russell analysis to the end of August 2021. The largest stock is AstraZeneca, the pharmaceutical giant, which has a market capitalisation of just over £131bn. It also makes up almost 7% of the index.

Unilever, the consumer goods firm, is the second biggest with a market capitalisation of £105bn and a 5.46% index weighting. Drinks company Diageo, HSBC bank, and drugs company GlaxoSmithKline are the next largest companies appearing in the index.

The data also reveals there are 19 sectors included in the FTSE 100 at the moment. Industrial goods and services are the most popular with 18 companies represented. This is followed by financial service, which boasts 10 companies, then basic resources with eight and the six stocks residing in the consumer products and services sector.

Promotions and relegations

Just like the football league tables, companies can get promoted to – and relegated from – this coveted index, albeit due to their share price performance rather than points scored.

The FTSE 100 is reviewed four times-a-year – in March, June, September and December – which ensures only the highest market cap stocks are included. Any constituent changes are implemented after the close of business on the third Friday of the review month. This means they will be effective from the following Monday.

Most recent movements

British supermarket Morrisons and Meggitt, the UK aerospace group, were promoted in the most recent quarterly index shake-up that took place this month (September 2021).

The share prices of both companies had risen considerably over recent months as they had been the subjects of enthusiastic takeover battles.

Morrisons, the UK’s fourth largest supermarket, has benefitted from the attentions of rival private equity groups Clayton, Dubilier and Rice, and a consortium led by Fortress Investment Group. Meggitt, meanwhile, saw its stock rise as US engineer Parker-Hannifin and TransDigm traded blows in their bid to take over the business.

Weir Group, the Scottish engineering company, has been demoted to the FTSE 250, while Just Eat was reassigned from the UK to the Netherlands. This makes it ineligible for inclusion in UK indices.

Previous promotions and relegations

These haven’t been the only promotions and relegations over the past year. A few companies have even yo-yoed between the FTSE 100 and the second tier, known as the FTSE 250.

In June this year, ITV, the producer and broadcaster, joined the FTSE 100. Making way for its promotion was Renishaw, a healthcare technology company. It had been a short stay in the top flight for Renishaw, which was only promoted to the top index in March 2021, alongside the aforementioned Weir Group. March had also seen Morrisons drop down to the FTSE 250, as well as Pennon Group, which provides environmental infrastructure and customer services.

How to invest in the FTSE 100 index?

You can get broad exposure to the FTSE 100 through index tracking funds. The value of your position will rise – or fall – in line with the movement of the index. Another option is buying individual positions in FTSE 100 names. However, this won’t give you exposure to the broader movements of the index.

A number of specialist active fund managers also buy into leading names in this index:

Threadneedle UK Extended Alpha

This fund primarily invests in large UK companies – but takes a slightly different approach.
As well as stocks it believes will perform well, it also buys those that are expected to do badly through an investment technique known as shorting. These ‘short positions’, which are taken using derivatives, enable the manager to profit from the fall in a company’s share price.

Chris Kinder, the manager, believes the UK outlook is more positive. He believes reasons to be cheerful include the “fading political risks” around Brexit, and the economy likely to benefit from the vaccine roll-out and buoyant consumer spending. “Despite the rally this year, UK equities are still deeply discounted relative to global averages,” he said. “We feel that this discount should start to narrow as the global economy recovers.”

Ninety One UK Alpha

This fund holds a string of FTSE 100 names, including oil companies BP and Royal Dutch Shell, as well as pharmaceutical giant GlaxoSmithKline. The fund’s most recent quarterly commentary, covering the period up to the end of June 2021, revealed it had more than 75% in FTSE 100 sized names and no small-cap exposure.

Its manager, Simon Brazier, favours businesses with strong balance sheets that reinvest their cash to deliver sustainable growth. “We look for great companies that can last and are able to deliver profits growth no matter what is going on in the outside world,” he said.

Artemis Income

According to its September 2021 fact sheet, the Artemis Income fund is 77.5% invested in large cap names, with 19.5% in mid caps and just 1.6% in smaller firms. Its largest holding is 3i Group, the investment company, which accounts for 6.2% of assets under management, followed by the 4.3% in banking giant Barclays.

Other names in the top 10 holdings include supermarket chain Tesco, life insurer Aviva, and mining company Anglo American. The fund is managed by Adrian Frost, Nick Shenton and Andy Marsh, who look for “stable, well-established businesses with the financial strength” to pay a share of their after-tax earnings to shareholders as dividends.

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