Despite being headquartered in the UK, it is well-known that many of the companies are managed outside the country and often are not investing in the UK economy.
Heading up the index are multinationals BP, RoyalDutchShell, Vodafone and HSBC, all headquartered in London but with offices everywhere in the world, reflecting how the British FTSE 100 has become distinctly international.
“The FTSE index was never designed to be reflective of the UK economy. Investors need to be aware of what they are investing in,” Tim Ward, chief executive officer of the Quoted Companies Alliance and former finance director at FTSE International, said.
Ultimately, the impact of the index is measured by the ten biggest companies. Only four or five stocks put together – such as GSK, HSBC, Vodafone, RoyalDutchShell and BP – can easily reach a 20% weighting of the entire index.
Ward added that UK-centric stocks on the FTSE are those which have a majority of employees in the UK, such as BT Group, Whitbread, ITV, Next and supermarkets such as Sainsbury and Morrison.
View of the past
According to some investors, the index is a reflection of a market gap, listing companies which have done well in the past and, hence, are the big players.
“The FTSE does not reflect many strong growth countries. It’s a view on what happened in the past, not what is to come. We must disrupt old practises and create new franchises that need to be sustainable,” James Budden, marketing director at Baillie Gifford, said.
In his view, consumer goods and services companies that have created a strong franchise such as Asos are the winners on the index, with a sprinkling of other FTSE suggestions such as Hargreaves Lansdown and HSBC in the financials group, and Rolls Royce.
Bricks and clicks
Historically, the big ten or heavy-weighted FTSE 100 companies tended to be sector-specific. Utilities, national building societies, media and technology companies, banks and mining firms all have had their run as the top-weighted sector in the index.
According to Justin Urquhart Stewart, director at Seven Investment Management, the next big sector is likely to be technology.
“Housing has already boomed, and banks are in recovery. Utilities are in difficulty. Technology is on the forefront and is really starting to impact the daily life of consumers. Retail is recovering but not booming, and the winners are online,” he said.
He added that John Lewis has become the seasonal success story operating on a ‘bricks and clicks’ model, offering both high street shops and online shopping.
Cyclical stock
Investors should look towards cyclical exposed stock because 2014 is widely expected to show improved economic growth, according to Neil Veitch, investment fund manager at SVM.
He points out GKN, which is listed in the FTSE 100 and exports parts for automobile and aerospace industries. The stock is trading at a discount to the sector and is an outright cyclical product which could prove profitable for investors, if both internal and external changes are benefiting the company.
Looking at other FTSE 100 companies, Veitch selects HSBC in the financial sector, which is looking stronger after a period of underperformance.
He also suggests Vodafone, where stock is trading at a discount to its peer group, making the company an attractive investment, along with its strong position in the UK, Germany and international assets.
