30th June 2011

F&C: Why geography is history for FTSE 100 investors

Investment orthodoxy has it that for UK investors an allocation to home-grown large-cap equities is the first step on the stockmarket risk ladder. The rationale for this is that bigger companies are less likely to fail than those at an earlier stage of development, and that staying close to home is safer as it minimises the risk of adverse currency movements.

The FTSE 100 index of the 100 biggest companies listed in the UK was, when it launched in 1984, a roll-call of British 'blue chip' household names, from Boots and British Home Stores to P&O, Trusthouse Forte and United Biscuits. But of the original 100, only 30 remain in the index today, with prominence now going to the likes of BHP Billiton, Anglo American and Xstrata, all of which feature in the top 20 - ahead of Tesco and all the high-street banks except HSBC.

These three examples illustrate two trends investors in FTSE 100 stocks should be aware of: the increasing internationalisation of the index, and the preponderance of stocks focused on mining and the extractive industries.
The past five years have seen a global boom, or supercycle, or bubble - depending on your personal view - in commodities, whether fossil fuels or industrial and precious metals. This has both boosted the values of existing businesses (though Rio Tinto and Johnson Matthey are among the original FTSE 100 constituents) and brought more foreign resources firms to the UK market.

Analysis of the make-up of the FTSE 100 by F&C Investments shows that at 31 May 2011 oil and gas and basic materials stocks together made up more than a third of the FTSE 100 (19.5% and 14.3% respectively). A decade ago, basic materials made up just 1.1% of the index although the oil and gas weighting was similar at 18.4%.
The recent flotation and immediate entry to the FTSE 100 of commodities trader Glencore has drawn parallels with the height of the dotcom boom in 2001. Yet at 31 May 2001 (admittedly after much of the froth had been blown off the sector) technology made up just 2.4% of the FTSE 100, a figure that has fallen to 1.0% today.

Many of the largest companies in the FTSE 100 - HSBC and BP included - pay their dividends in dollars, and the companies in the burgeoning oil and mining sectors operate almost entirely outside the UK, often in 'frontier' emerging market areas that are far from most investors' perceptions of a safe, sturdy UK blue-chip.
This trend is not merely a British phenomenon; many of the largest exchanges worldwide are home to a host of foreign companies, from China Mobile in New York to the newly listed Prada in Hong Kong. As technology shrinks the world, geography is increasingly outdated as a means of classifying investments.

Jason Hollands, Head of Corporate Affairs at F&C Investments, said: "While investors might have historically chosen to allocate their portfolios on geographical lines, the boundaries have literally blurred. In addition, concentration in indices such as the FTSE 100 means a small number of stocks dominate the main indices - for instance, the top 10 stocks in the Footsie currently account for 45.8% of the total (down from 53.8% in 2001 but up from 37.3% in 1991). Because of this, investors seeking a balanced portfolio increasingly need to consider diversifying not just geographically, but also by sector. A diversified global investment fund or a multi-manager fund might be able to help them achieve this better than a fund that tracks an index, whether implicitly or explicitly."

The F&C Group offers a broad range of diversified investments, from the flagship Foreign & Colonial Investment Trust, which invests in quoted and unquoted investments worldwide, to the suite of multi-asset and multi-manager funds run by Thames River Multi-Capital. All these products invest to a greater or lesser extent in shares, so their value can go down as well as up and they should be viewed as longer-term investments. Investors should consider seeking independent advice when choosing investments.

Please be aware that these are each individual's own views and not necessarily those of the F&C Group. They do not constitute financial advice.

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