Here is a poor prediction from 40 years ago, 1984, when the FTSE 100 index was born. There is “no question of the FT 30 index disappearing,” opined the deputy chief executive of the Financial Times, arguing that the new-fangled creation would sit happily alongside the paper’s own FT 30, the pre-eminent barometer of the UK stock market since 1935.
It did not work out that way. The FTSE 100 grabbed attention from the off, just as its designers intended. It was created by the London Stock Exchange and the early players in the futures and options market for the then emerging era of electronic trading and derivative products. A catchy shorthand – the Footsie – helped.
Companies’ pure stock market capitalisations dictated weightings within the index, as they still do, ensuring mathematical discipline and easy replication. A total of 100 constituents, updated quarterly, was adopted not only for the sake of a round number but also because 100 stock symbols was the maximum that could be displayed on a single page of the new Topic electronic information terminals that the exchange was flogging.
The FT 30 did not stand a chance. Each stock in its narrow index was given equal weight, meaning weird upsets occurred if a single small company plunged in value. A selection based on a hand-picked sample of the UK economy, with prices updated only hourly, also felt woefully old-fashioned. In the era of privatisations (BT came in the first year of the Footsie) and big bang in 1986, the market wanted to trade more of everything listed in London.
During Black Monday in 1987 – when the Footsie fell 10.8%, and then 12.2% the next day – the index and the colourful trading screens provided visuals for television. “When the market crashed, it flashed red. It captured the imagination not just of the media, but also of the investing public,” says Mark Makepeace, who spent 35 years building the exchange’s (now enormous) index business.
The FT’s sniffiness in 1984 was because it had been carved out of the original talks. On day one – 3 January – the index was called the SE 100, with the initials standing for Stock Exchange. An irate FT muscled its way into the tent a few weeks later and the name became the FT-SE 100, with the hyphen eventually dropped. The FT 30 can still be found prices page of the paper (reading glasses advised), but it is a curiosity that has never interested funds that track indices.
The score for the Footsie after four decades is a rise from 1,000 points at launch to 7,733, though that understates the total return because the constituents obviously paid dividends along the way. With dividends reinvested, a £1,000 investment in the Footsie in 1984 is now worth £22,550. If that sum sounds enormous, remember the powerful effect of compounding. The annualised rate from owning the Footsie for 40 years is slightly more than 8%, which comfortably outstrips inflation but is not Warren Buffett’s 20%-ish.
Twenty-six companies survive from the original index, although some, such as Aviva and NatWest, are really reconstituted entities. The disappeared originals – names such as Hanson Trust, Hawker Siddeley and Trafalgar House – recall another age. The best years were the run to the turn of the century. On the last day of 1999, the height of the dotcom mania, the Footsie came close to 7,000, so another 773 points over the next 23 years represents slim pickings, dividends notwithstanding.
But the designers’ aim of latching on to derivatives and indexed financial products has been a commercial triumph, as Makepeace chronicled in his book, FTSE. The rise of passive investing via exchange-traded funds and index funds has been the biggest development in global stock markets over the past 30 years. The FTSE International business that emerged a decade after the launch of the Footsie, and then became FTSE Russell via acquisition, is now a big component of the parent, the London Stock Exchange Group.
It makes its money by selling real-time data to fund managers and other financial players, and via licensing fees. FTSE Russell is one of the big three index names, alongside MSCI and S&P, and offers indices in stocks and bonds around the globe. Low costs, choice and the ability to create new indices lie behind the revolution. “Indices are for the world of investing as recipes are for the world of cooking,” says David Sol, the head of policy and governance at FTSE Russell.
The FTSE 100 itself, though, is showing its age. It contains some excellent long-term performers (see below) but is heavy in banks, insurers and international miners that rushed to London in the 1990s and early 2000 for the prestige of Footsie status. As such, it has become a symbol of how the 21st-century technology revolution has bypassed London. After years of consultations, reviews and regulatory tweaks, the exchange and the government are contemplating bigger reforms to attract high-growth firms, but the lobby to bring back Arm Holdings, a former Footsie star, failed. The Cambridge-based chip designer, which was bought by SoftBank in 2016, relisted in New York.
The view of Makepeace, who left FTSE Russell four years ago, is instructive: “The FTSE 100 is at an inflexion point. The companies that make up the Footsie are the older industries. We face climate change and huge challenges ahead. If you look at the FTSE 100 in 40 years from now, it will look nothing like today’s index. London needs to open up and attract new companies. Technology is driving this and the US is a magnet for companies who are leaders in new technologies.
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“London has to think about the new industries of the next 20, 30 years. It used to be a strength of London to get those companies to list in the UK and get them to stick with the UK. It’s no good having a market made up of old industries because it will bring the others down.”
How have the originals fared?
Cigarettes and analytics win. From the original 100 members of the FTSE 100 index, only a quarter are still present in recognisable form. A few of those, including NatWest and Shell, have been through too many corporate reorganisations to allow meaningful data on 40-year compound returns for shareholders. But, within the measurable collection, two names stand out as top performers: British American Tobacco, returning 16.4% a year, and Relx, with 14.4%, according to the stock exchange’s data.
The critical phrase in the calculation is “with dividends reinvested”. Over a period as long as 40 years, dividends can provide the fuel for the compounding effect, often a long-term investor’s best friend. That is especially the case with BAT, which has demonstrated that even declining industries can throw off huge quantities of cash.
After a huge legal settlement with US regulators in 1998, the tobacco industry became a cash machine. Between 2000 and 2017, BAT’s share price – so ignoring dividends – rose tenfold. The performance will not feel so pretty for buyers at the top, however: the shares have since halved.
The flyer in the pack, then, is really Relx, possibly the most quietly impressive performer among big UK-listed companies over the past 20 years. In 1984, the company was Reed International, a trade book and magazine publisher, and became Reed-Elsevier in 1993 via merger with a Dutch scientific publisher. The Relx name was adopted in 2015 and the company is now the ninth largest on the London market, worth £58bn, more than the rest of the FTSE 100 media sector combined.
In reality, Relx is best thought of as an information and analytics firm with a specialism in scientific, legal and medical data – flagship businesses include the Lancet and LexisNexis. And it is rare in that it is already commercialising artificial intelligence in its products. The compounding effect in its case flows from a year in, year out ability to grow revenues faster than costs. The share price has risen almost sixfold in the past decade.
