FTSE 100 or S&P 500?
Britain has historically punched above its weight on world markets. London is home to the biggest foreign exchange market in the world and the FTSE 100 index is an internationally idolised index where stocks generate a greater share of revenues from overseas compared to the US market. But despite these prominent features, the FTSE languishes behind America’s S&P 500 index over three- and five years. A £10,000 investment in the S&P more than doubled to £20,310 over five years, a profit of £6,160 over the same investment in the FTSE.
| Number of Years Invested | FTSE 100 (Growth of £10,000 |
S&P 500 (Growth of £10,000) |
Performance Profit of S&P 500 versus FTSE 100 (£) |
|---|---|---|---|
| Three | 11,940 | 15,190 | 3,250 |
| Five | 14,150 | 20,310 | 6,160 |
Figures correct as at 21st August 2015
Why has the FTSE lagged behind the S&P?
The UK’s underperformance against the US is attributable to two features of the FTSE’s make-up: its sector and style.
1. Sectors
America is home to high-flying tech stocks
The grouping of stocks into sectors has a huge bearing on the performance of stock markets. High-flying tech stocks comprise nearly 20% of the S&P 500 index compared to a lowly 1% in the FTSE. America’s index is filled with tech giants such as Apple and Google that have propelled the S&P’s rise, both stocks having trebled in the last five years. Few investors in contrast will have heard of ARM Holdings, the FTSE’s most famous tech stock.
Britain is being weighed down by resources stocks
The FTSE’s lack of tech is offset by a 20% counterweight in resources stocks, twice the figure assigned to the US benchmark. Unfortunately these energy and materials sectors have suffered from falling commodity prices. Mining stocks Anglo American and Randgold Resources have weighed particularly heavy on returns, counting double-digit losses and pulling down returns in an otherwise upward trending five years for the FTSE.
2. Style
FTSE is full of value stocks such as Tesco
Akin to fashion, there are styles of investing for the market too which can help or hinder performance depending on the stage of the market cycle. Style investing takes two forms: value or growth. Value stocks trade cheaply relative to their book value, but can offer substantial upside. Shell and BP are current big-name value stocks in the FTSE 100 but can offer substantial upside when stock markets are nervous and when the company’s prospects improve.
S&P benefits from Starbucks-type growth stocks
Growth stocks exhibit higher sales revenues than value stocks but are more expensive to buy. Starbucks and Facebook are two companies with strong sales figures but expensive share prices in the S&P 500.
Growth investing is the current fashion
Value and growth stocks go through peak and trough cycles. For example, the value style beat growth in the early noughties whilst growth has outperformed value since the credit crunch low in 2009. The recent good run for growth style investing benefits the S&P 500 index more than the FTSE as the US index comprises more growth stocks such as the aforementioned Starbucks and Facebook in addition to Google, Apple, Walt Disney and Nike. America’s style and sector advantage has led to the S&P 500’s stronger return (in blue) compared to the FTSE 100 (green) during the last five years as illustrated in the following graph.
Source: Morningstar data
Past performance is not a reliable indicator to future results.
Which market is likely to outperform going forward?
Momentum is against all markets at the moment and the FTSE is selling-off more than the S&P. Our international index is being pulled down by its links to emerging markets where growth is slowing and demand for London-listed commodities is falling. But FTSE investors should try to take heart from the fact that style and sectors go through cycles. The freefalling FTSE is getting cheaper every day meaning that when a bounce-back comes it could well be sharper than the S&P.
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