FTSE 100 reaches anniversary of record closing level: Where now for the index?
Today (Wednesday 27 April) is a significant one for FTSE 100 followers as it’s the anniversary of the index’s record closing level – 7,103 – a dizzyingly high number compared with today’s, which lurks around 10% lower.
That’s not to say that the UK as a whole is doing 10% worse though. The FTSE 100 represents the biggest companies traded on the London Stock Exchange and is dominated by financial, energy and mining companies, all of which have had a volatile time recently. In fact, one third of FTSE 100 companies have seen a share price rise since last April and the average UK Smaller Companies fund has returned 5.3% within the same timespan.
You can read more about life outside of the FTSE 100 in our story ‘A lesson from history: how sensible investing could have made you a million’.
Investors and would-be investors should also keep in mind that uncertainty over Britain’s future with the EU has unsettled markets and will continue to do so for the foreseeable future.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “It’s easy to get carried away with the twists and turns of the FTSE 100, but it’s important to bear in mind the headline index is heavily influenced by the performance of the largest stocks, so doesn’t give the full picture of how UK plc is doing.
“Active fund managers, particularly those investing in smaller companies, have largely sidestepped the worst of the problems encountered by banking and commodity companies since last April. As a result many fund investors have probably done better than they might expect over the last year.”
This boosts the argument for investing in active funds over passive (also known as trackers), but it’s worth bearing in mind that active funds do cost a lot more to hold in terms of their annual ongoing charges. Making what should be decisions for the long term – at least five years is the common advice – based on a single year of stock market performance wouldn’t be the wisest of ideas.
Rebecca O'Keeffe, head of investment at Interactive Investor says: "In theory, in a low interest, low return environment, where returns to active management may be less than the additional management costs, low-cost options such as tracker funds or ETFs make good sense. However, when markets are volatile – as they are now, there are good reasons for preferring active management where there is scope for a manager to add value by choosing which sectors and stocks to hold.
"Over the past year, when markets have been very choppy, investors who have chosen established actively managed funds, such as Fundsmith Equity, have been well rewarded for their decision. Although higher-cost, the ability for a fund manager to choose large or small cap stocks, to be over or under invested and to make aggressive asset management decisions can significantly pay off."
Choose an active fund whose manager has a consistent track record of outperforming the index in different market conditions, such as the CF Woodford Equity Income Fund, managed by Neil Woodford.
You can read more about the difference between the two types of funds in our article ‘Should you invest in tracker funds?’
If you want to get started with investing then read our article ‘How to invest in 2016: the basics’.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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.
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.