WE BEAT the Footsie! That’s the proud boast of fund managers as they seek credibility for their New Year predictions. As the FTSE 100 is the index of the top 100 companies by market capitalisation quoted on the London Stock Exchange, it must by definition be a feat to beat it.
These behemoths – giants in their respective sectors, globally traded, with massive balance sheets and often enjoying market dominant positions – should generally outperform a portfolio of shares comprising less powerful contenders.
But the FTSE 100 is not an infallible yardstick of performance. The past year set a cautionary example as many companies in the top-flight index turned in some of their worst performances for years. Heavily represented in the top 100 are oil and energy companies, food retailers and mining giants. The three sectors that fared worst in 2014 were: oil and energy, food retailing and mining companies.
The benchmark index fell by 2.7 per cent in 2014, hit by plunging oil prices, the crisis in Russia, slowing global growth, and a torrid time for the UK’s food retailers. As a result the FTSE 100 recorded its first annual fall since 2011, losing some £46 billion for private investors, insurance companies and pension funds. And its performance was in sharp contrast to the US, where both the Dow Jones Industrial Average and S&P 500 climbed to record highs.
Hopes of a “Santa rally” were disabused as performance in December went from bad to worse. The drop in crude prices, destabilising political developments in Greece and Russia’s currency crisis sparked a sell-off at the start of the month. The index finally recorded a monthly decline of 2.3 per cent – the first time it has fallen in December since 2002.
So much for the high hopes that the FTSE 100 would match and exceed the peak of 6,930.20 set in the closing days of 1999.
Of the deadweights that dragged the index lower, arguably the most striking was the dismal performance of Britain’s leading food retailing companies. Few private portfolios have not included shares in high street names such as Tesco, Sainsbury’s and Morrisons.
Over the years, sensitivity to risk was lulled by relentless growth in like-for-like sales, and edge-of-town store development seeming to pave the way for further growth in sales, profits, investment – and dividends. But shares in Morrisons fell by 29 per cent over the year, Sainsbury’s tumbled by 33 per cent, while Tesco took the wooden spoon, with a 42.7 per cent collapse in the share price after it was found to have massively overstated profits. No early recovery here looks likely. Indeed, Tesco looks set for a lengthy period of contraction, store cutback and sell-offs, sharply reduced capital investment – and possibly a rights issue to bolster the company’s financial position.
The FTSE 100 was also dragged down by oil- and commodity-related shares. Together, these comprise some 20 per cent of the index.
Mining giant Anglo American fell 7 per cent, Rio Tinto by 11 per cent (hit by the plunge in iron ore prices), BP by 16 per cent, BHP Billiton 25 per cent, BG Group 33 per cent and Tullow Oil 52 per cent. For oil companies in particular this was a savage year – and here, too, no early recovery looks likely. The price of Brent crude, already down from $115 a barrel in June to $60 by Christmas, fell below $56 a barrel at one point last week.
Finally, deepening worries over the Russian economy and the tightening regime of sanctions against that country hit some of the UK’s leading electrical engineering and defence contractors. Rolls-Royce, Smiths Group, ARM Holdings and GKN were among those affected.
After such markedly poor performance, it would be tempting to speculate on a mean reversion and a recovery in the FTSE 100 to its old ways. For the record, the consensus forecast for 2015 is for a 7 per cent overall return, some 3 per cent of this in the form of dividends. This would leave 4 per cent from capital gains, lifting the FTSE 100, currently 6,566, by 260 points to around 6,820.
Time will tell.
Unit trusts offer a surprise result for investors
We know that, over the longer term, and on average, investment trusts out-perform their unit trust counterparts. But here, too, 2014 proved an exception.
Over the 12 months to the end of November, investment trusts out-performed their open-ended equivalents in only seven out of 17 sub-sectors. The largest out-performance by investment trusts came in the global growth sector, and there was also strong out-performance from investment trusts in the Europe sector.
The most significant underperformance of investment trusts relative to open-ended funds came in the Japan smaller companies sub-sector, largely as a result of discount widening. Investment trusts also underperformed open-ended funds in the technology sector, with an underweight allocation to large-cap tech stocks having a significant negative impact during the technology sell-off last spring.
Over the longer term, investment trusts out-performed their open-ended equivalents in 14 out of 17 sub-sectors over three years, 16 out of 17 over five and 14 out of 17 over ten years. But every so often, fate throws a googly – and 2014 was one of them.
SUBSCRIBE TO THE SCOTSMAN’S BUSINESS BRIEFING