What is the FTSE 100?

Sam Slator 02/03/2023 in Basics

The FTSE 100 is regularly quoted in news reports – but what is it and why do investors need to understand how it works?

Here we take a look at the history of this influential stock market index, its current constituents, and how it can inform your investment decisions.

What is the FTSE 100?

It’s a tradeable stock market index that contains the 100 largest companies – by market capitalisation – listed on the London Stock Exchange.

The index is often referred to as ‘the footsie’ and regarded as a barometer of UK investing health, even though many of its companies sell globally.

News reporters around the world will refer to the daily performance of the FTSE 100, especially when analysing the impact of significant global events on companies and economies.

When was the FTSE 100 launched?

The FTSE 100 was launched back in January 1984 at a level of 1,000. Back then, the list of companies was packed full of UK household names, according to an analysis by Schroders*.

“The index bulged with household names, such as retailer MFI Furniture, Boots the pharmacy and grocer Tesco,” it stated. “These were businesses built to meet the demands of the UK consumer.”

The launch of the FTSE 100 coincided with the bull market of the 1980s and 1990s, including the privatisation of many nationalised industries in the UK.

How does the FTSE 100 operate?

The FTSE 100 index is reviewed four times each year, in March, June, September and December to ensure only the largest companies are included.

The process is overseen by FTSE Russell, a global index provider that provides a range of benchmarking, analytics, and data solutions for investors.

According to FTSE Russell, the rules-driven impartial reviews ensure indexes “continue to portray an accurate reflection” of the market they represent.

Has the FTSE 100 changed over the years?

Yes. The FTSE 100 has changed enormously since its launch in the mid-1980s, with the most obvious being a higher degree of international businesses on the index.

Over the decades, many of its original constituents have disappeared completely due to a variety of mergers, takeovers, and other deals. These include Thorn EMI, which rented electrical equipment; sweet manufacturer Rowntree Mackintosh; and chemist chain Boots, according to Schroders.

“Through mergers, failures, promotions, demotions, new listings and globalisation the FTSE 100 has evolved from a UK-centric index to one that represents the fortunes of the global economy,” it stated.

What companies are listed on the FTSE 100 today?

A long list of international companies make up the current FTSE 100 index – and many of these globally important businesses will be very familiar. For example, there are oil majors BP and Shell; HSBC, Lloyds, NatWest, and Barclays banks; and pharmaceutical businesses such as Rio Tinto and Anglo American*.

Telecommunication giants Vodafone and BT; defence business BAE Systems; retailers Next and JD Sports Fashion; and Associated British Foods, the owner of Primark, are also on the list*.

Criticisms, issues, and misconceptions

One of the criticisms levelled at the FTSE 100 is the fact it’s so heavily exposed to a relative handful of areas, including oil, mining, banks, and insurers. This can make the index vulnerable to problems affecting those particular sectors. Similarly, it can also reap the benefits should such businesses outperform.

While it’s often used to effectively take the pulse of the UK economy, many of its constituents today are actually multinational operations too. Global giants such as GlaxoSmithKline, BP and British American Tobacco sell worldwide so their fortunes aren’t closely tied to the UK consumer.

An analysis published by FTSE Russell in October 2022 highlighted how FTSE 100 companies were also more exposed to foreign revenues than those in the FTSE 250 – the index of the next 250 largest companies, known as ‘mid-caps’. “Around 82% of the FTSE 100 revenues are from overseas markets, while, though still sizeable, this figure drops to nearly 57% for the FTSE 250,” it stated.

Therefore, if you want more UK-focused stocks then you’ll probably need to go down the market capitalisation scale to smaller businesses.

How has the FTSE 100 performed?

The FTSE 100 has been on something of a rollercoaster ride over the last four decades as the world has enjoyed boom periods and endured recessions.

Investors have had more reasons to celebrate over the past year in particular as the index has hit all-time highs with energy, mining and banking sectors profiting from rising oil prices and high inflation.

Getting exposure to the FTSE 100

There are different ways of getting exposure to the FTSE 100. Deciding which is the most suitable will depend on your aims, experience of investing, and attitude to risk. For example, a straightforward index tracker will provide you with returns similar to the performance of the
index itself.

Alternatively, you can buy shares in companies that are listed on the index. However, this is riskier as your investment will be completely linked to the fortunes of those particular businesses.

A better option may be to invest in a fund that has broad exposure to such companies. The manager at the helm will also have responsibility for making the right investment calls.

Elite Rated funds that invest significantly in FTSE 100 businesses

A number of Elite Rated UK equity funds invest in FTSE 100 companies. Here are three examples:

JOHCM UK Dynamic

Manager Alex Savvides has a contrarian approach, looking for UK companies which are undergoing substantial positive change that is not recognised in the current share price. He has strict investment disciplines: each holding in the portfolio must pay a dividend, and the companies will be well established, in structurally sound markets. He is free to choose across the market cap spectrum, meaning the portfolio can invest in companies of any size and its bias towards any particular market segment will vary over time. Currently, the fund has almost 72% of assets under management in FTSE 100 companies**.

Jupiter UK Special Situations

Managed with a distinct contrarian and value-based approach, Jupiter UK Special Situations fund offers investors access to a well-diversified portfolio of predominantly larger UK companies. The manager, Ben Whitmore, is hugely experienced and has had considerable success running this type of mandate throughout his career. The fund currently has just under 75% of assets under management invest in FTSE 100 companies, including BP, Shell, GlaxoSmithKline, and HSBC*.

The City of London Investment Trust

The City of London investment trust aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 56 years. It has been run by Job Curtis for more than three decades and his thorough research process and conservative approach to stock selection have generated steady returns over a long time.

*Source: Schroders, How the FTSE has changed over 33 years, 2017
**Source: fund factsheet, 31 January 2023

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.