Four lessons to draw from 18¼ years of precisely zero from UK stocks

A potential takeover bid for a fourth FTSE 100 stock is helping the index to try to cling on to the 7,000 mark, as Takeda’s plan to consider an offer for drug manufacturer Shire adds to the offers (hostile or otherwise) for GKN, Smurfit Kappa and Sky.

But that 7,000 mark is still awfully close to the 6,930.2 mark reached on 31 December 1999. This represented a new all-time high for the FTSE 100 and turned out to be the very peak for the benchmark index, as air promptly started to leak out of the technology, media and telecoms (TMT) bubble.

In other words, the UK’s premier index has gone nowhere for just over 18 years. At its closing low on Monday 26 March of 6,889 it had even contrived to record a small loss over that period.

For patient portfolio builders, that could make for depressing reading, but even in the face of such apparent adversity it is possible to draw four valuable lessons when it comes to portfolio construction and asset allocation.

1. The price paid for an investment really does matter

Since the 31 December 1999 high of 6,930, the FTSE 100 has seen two bear markets (2001-03 and 2007-09) and two bull markets (2003-07 and 2009 onwards).

Having lost that peak, it took the benchmark until 2015 to reach it again and on 26 March 2018 it stood around half-a-percent below it at 6,889.

FTSE 100 is almost unchanged relative to its tech-bubble peak of 31 December 1999.

Source: Thomson Reuters Datastream. (Covers period to 26 March 2018).

The message here is three-fold.

  • At first glance, this makes ‘buy-and-hold’ strategies look a bit sick (but more of that in a moment).
  • Those advisers and clients who eschewed ‘buy-and-hold’ could have got into even worse trouble, if they did not resist the powerful temptation to be dragged in at the top (when all seems rosy) and flee at the bottom (when all seems black) can be awfully hard to resists.
  • Those advisers who did try to time the market therefore needed to heed Warren Buffett’s aphorism about being “fearful when others are greedy and greedy when others are fearful.” When greed is dominant, valuations are likely to be bubbly and sitting at unsustainable levels. When fear is dominant, valuations are likely to be cheap and build in a margin of safety. So the price paid for an investment really is a key determinant of the long-term return, where it is an index, fund or individual stock or bond.

2. Picking stocks can pay off (but it isn’t easy)

Another way to try and get around the poor headline capital return from the FTSE 100 would be to try and pick individual winning stocks and dodge the losers (or pay a fund manager to do it for you, if the time and research effort involved are simply too much).

The good news is this could have paid off handsomely. No fewer than 56 of the 100 firms that made up the FTSE 100 in 1999 recorded a better return than the broader index.

The bad news is that only 51 still survive to this day and, of those, only 32 have offered a positive capital return since the end of 1999. And of the 100 firms in total, 22 fell by more than 50% and seven by more than 90%, inflicting real pain on any fund manager, adviser or client who picked out those as the new millennium dawned.

Best and worst 10 performers among the 51 FTSE 100 members at the 1999 peak that are still in the index today

Source: Thomson Reuters Datastream. (Covers period to 26 March 2018).
*No data available for Compass before 2001 merger with Granada.

In other words, spotting the winners (that either survived or were taken over for a fat price) was no easier than avoiding the disasters (that either went broke, dished out profit warnings and share price collapses or were snapped up at lower prices following wider market declines).

Best and worst 10 performers among all of FTSE 100 members at the 1999 peak

Source: Thomson Reuters Datastream. Covers period to 26 March 2018.
Companies still in the FTSE 100 highlighted in BOLD
*No data available for Bass owing to break-up of company as Six Continents in 2003 (spawning Mitchells & Butler, InterContinental Hotels and ultimately Britvic)
*No data available for CGU, which merged with Norwich Union to form CGNU, which became known as Aviva in 2002
*No data available for Compass before 2001 merger with Granada.
*No data available for Granada owing to 2001 merger with Compass and subsequent demerger of Granada Media, which then merged with Carlton to form ITV in 2004
*No data available for Great Universal Stores, which demerged Burberry in 2005 and the split into Experian and Home Retail in 2006, the latter being acquired and broken by Sainsbury and Wesfarmers in 2016

3. Patience can still be rewarded

Thankfully patience can get its reward and it comes in the form of dividends – and these precious payments mean that holding a passive index tracker can pay off, as can operating a buy-and-hold strategy (providing advisors’ and clients’ portfolios are capable to withstanding the ups and downs in capital values in between).

This can be demonstrated by looking at the performance in the FTSE 100 in purely capital returns and total return terms. In the latter case, dividends are harvested and then reinvested.

Total returns index shows the long-term value of dividend reinvestment

Source: Thomson Reuters Datastream

The difference is startling – but again, it must be remembered that even the total return index suffered two large falls during the 2001-03 and 2007-09 bear markets, even if they were not as pronounced as the declines in the headline index.

Even the FTSE total return index has suffered dips, despite the advantages of dividend reinvestment

Source: Thomson Reuters Datastream. (Covers period to 26 March 2018).

4. Beware home bias

One way of getting around the UK’s disappointing headline performance since the end of the 1990s bull run would have been to fight any natural home-leaning bias and diversify by looking overseas.

In capital terms the UK has lagged all major overseas geographies in local currencies. A drop in the pound over the period has further boosted returns from overseas arenas (although none of these trends are guaranteed to repeat themselves in the future).

UK has done badly relative to key overseas markets since the end of 1999

Source: Thomson Reuters Datastream. (Covers period to 26 March 2018).

The UK’s generally superior dividend yield helps a little in total return terms but the showing relative to international options has still generally been poor.

UK has done badly relative to key overseas markets since the end of 1999 even allowing for its superior dividend yield

Source: Thomson Reuters Datastream. (Covers period to 26 March 2018).

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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