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Can you make money in the FTSE100?

Can you make money by investing in the FTSE100? This thought came to mind when looking at some of the recent market statistics. It’s quite an important question because most stock market investors are heavily biased to that segment of the market (as opposed to FTSE250, small cap or AIM stocks) simply because the market cap of the FTSE100 is a very high proportion of the overall UK market. For example, it’s about 80% of the FTSE AllShare. So if you are invested in a typical UK equity index tracker, or UK focussed generalist investment trust, you are almost bound to have a high proportion of your assets invested in the FTSE100.

But the performance of the FTSE100 over the last year has been very poor – down 11% at the time of writing, whereas the FTSE250 is up 7% and the FTSE AIM index is up 2%. Small cap stocks have definitely been the place to be in the last year.

Another measure of the health (or lack of it) of larger companies was recently reported by The Share Centre. FTSE100 companies overall only have dividend cover of 1.1 times, i.e. reported earnings are only slightly higher than dividends paid out. Whereas FTSE250 companies have cover of 1.5 times which would normally be considered a more prudent level.

The large proportion of natural resource companies in the FTSE100 (miners, oil/gas companies) explains a lot of the problems. Companies such as BP, Glencore, Shell and Rio Tinto are some of the obvious culprits, but then retailers such as Morrisons, Sainsbury, and Tesco have also been badly hit. Then you have more specific company problems in companies like Rolls-Royce. Other large index constituents such as Vodafone are also much where they were a year ago and banks (another major index component) are also flat or lower – Lloyds Banking Group may be doing better but investors are apparently still wary of investing in it even though dividends are returning. Pharmaceuticals such as Glaxo are down, with them taking a hit recently from concerns about possible price controls in the USA. although Terry Smith’s recent article suggesting that their “headline” profits were a mirage because of the regular “exceptionals” can’t have helped – a feature of many large cap companies of course.

But it is still possible to make money holding large cap stocks, so long as you are selective. A good example of this was the results from City of London Investment Trust who recently published their Annual Report (their AGM is on the 23rd October).

Their net asset value total return was up 6.4% in 2014 which was ahead of its benchmark in the year to end of June (the AIC UK Equity Income sector), and way ahead of the FTSE AllShare (up only 2.6%). How did well respected fund manager Job Curtis achieve yet another sound year of performance?

He still held BP, Shell, Vodafone and Glaxo in his top ten holdings. But he also held large stakes in building companies such as Taylor Wimpey, Persimmon and Berkeley Group which clearly helped. He also benefited from holdings in property REITS where rising office rents in London drove returns up.

So it’s more a question of how he avoided the complete dogs. For example, he sold the two holdings in the oil sector he considered the weakest – Statoil and ENI; and although he retained Shell and BP, he was underweight in those versus the index. In commodities, he reduced the holding in Anglo American, but sold South32 (a spin off from BHP Billiton) while retaining BHP Billiton itself and Rio Tinto on the basis they were low cost producers.

In essence, it looks a classic example of where active fund management can achieve improved performance over an index by judicious tactical stock selection even in the megacap stocks that dominate the FTSE100. City of London IT is by its nature an income focussed trust and hence is likely always to have a large proportion of its holdings in larger stocks and reassure many investors by continuing to hold some of the big name companies. But private investors can perhaps be even more selective and by having a stronger weighting in smaller companies (even AIM companies I would suggest) you could achieve an even better result if you care for a wee bit more excitement.

Note this writer does hold City of London IT.

Roger Lawson

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