Are blue chip companies really safe havens?
Investors shouldn't be lured into thinking that blue chip companies are safe havens just because of their reputation for being robust during turbulent times.
For example, when Sir Terry Leahy, Tesco's chief executive of nearly 14 years, recently gave notice of his shock departure, Tesco shares instantly went down by nearly 3% – showing how sensitive share prices can be.
A similar situation arose at Marks & Spencer, when Stuart Rose announced he was stepping down.
Rebecca O'Keefe, head of investments at broker Interactive Investor, says: "Investors are often faced with significant changes affecting stocks they own, and blue chip stocks face these challenges too."
But she warns against a knee-jerk reaction: "Explore whether such changes affect your rationale for owning the stock. If it has, then certainly try and pick your exit timing. If not, stay invested."
While large caps aren't immune to changes, they still offer the best way to weather turbulent markets, according to experts.
They say large cap companies with solid balance sheets and a widely accepted product or service base won't suffer from the impending belt-tightening by governments and consumers.
An additional benefit of investing in such companies – or in funds that hold them – is they tend to provide exposure to consumer trends in emerging markets.
Peter Kirkman, manager of JPM Global Consumer Trends fund, says: "As emerging markets continue to see an increasing trend towards higher living standards and urbanisation, their consumption patterns are changing.
"Western brands are benefiting greatly from this because they have already established business models and distribution channels."
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.