Happy 40th birthday to the FTSE 100

The FTSE 100 is an index of the biggest 100 companies listed in London and an important yardstick of UK stock market returns. As it reaches its 40^th birthday today, here’s six facts about the index – by Rob Morgan

1. The FTSE 100 has trounced inflation…
 
The FTSE 100 has been far from the best global market index over the years, especially since the turn of the millennium as capital returns have stagnated. However, it’s still been a real inflation buster. Over the past 40 years the index has returned £23.19 for each pound invested. That’s well ahead of inflation as £1 in 1984 is worth £3.10 today, amply illustrating the wealth-building nature of investing in shares.
 

2…but much of the return has come from dividends
 
Dividends, the payments of profits from companies to shareholders, is responsible for over three quarters of the return. In capital growth terms an investor able to track the performance of the index from its starting point would have £5.47 for each £1 invested compared to the £23.19 quoted above once reinvested dividends are factored in.

Dividends are often overlooked, but they are a really important part of investing and can be a way to help counter the inevitable day-to-day ups and downs. Although the stock market is a bumpy ride, the sums accruing slowly but surely from dividends tend to be much smoother.
 

3. Volatility has been significant
 
The benchmark has risen from 1,000 on 3^rd January 1984 to around 7,700 today but the ride has been far from smooth with the index declining by more than a third on four occasions. Troughs occurred on Black Monday in 1987, during 2020’s Covid crisis and in 2009 following the global financial meltdown. However, the 2003 nadir amidst the fallout of the dotcom bubble was the largest with a 53% decline from the peak around three years earlier.

The record high was achieved in February 2023 with the index briefly surpassing 8,000 for the first time. However, it has since fallen back as worries surrounding the stubbornness of inflation and a higher trajectory of interest rates deterred investors.
 

4. A quarter of the original constituents are still in the index
 
Some of the original 100 companies such as Marks & Spencer, Prudential, Rio Tinto and NatWest are still part of the index under the same name, and a total of 26 can trace their history back to original members. Others have been acquired, gone into private ownership or broken up. A significant number have dropped down into a different index and no longer rank among the top hundred London-listed companies by size.

There has been a low out-and-out failure rate considering the rapid technological change we have seen over the past four decades, which illustrates the benefits of investing in ‘blue chip’ companies. Although they are often not the most exciting of investments, extinctions tend to be rare among larger businesses and their staying power can be a source of cashflows and dividends to investors.
 
5. Three quarters of FTSE 100 earnings are from overseas
 
The FTSE 100 has grown more internationally focussed over the years meaning investors buying into the index are backing a collection of large multinationals rather than being tied to the fortunes of the UK economy. As much as three-quarters of the earnings of constituents come from non-UK activities, with internationally oriented energy and mining stocks alongside global pharmaceutical giants, food and beverage firms and the big banks accounting for much of this. It’s no longer a barometer for the health of the UK economy, and the FTSE 250, the mid-tier index, is a better domestic gauge.
 
6. Life begins at 40? The FTSE 100 is cheaper today than most global markets
 
The FTSE has seen plenty of ups and downs over the years. The dotcom boom and bust, the global financial crisis and the COVID-19 pandemic to name but a few. However, after each one it has gone on to record new highs.

The index underperformed on the world stage in 2023 as weaker energy prices were a headwind for the FTSE’s oil and gas heavyweights while, more broadly, a weaker dollar was negative for businesses with mostly overseas earnings. However, that leaves the index in cheap territory versus other global markets, so the prospects going forward look more positive.
 
Rob Morgan is Chief Investment Analyst at Charles Stanley