Why The FTSE 100 Index Has Changed

FTSE100 10 biggest losers.
-9.40% Barclays
-9.61% Xstrata
-9.75% Eurasian
-9.81% Burberry
-10.09% Lloyds
-10.30% Rio Tinto
-11.68% Fresnillo
-12.37% Kazakhmys
-12.70% Antofagasta
-13.28% Vedanta

What’s going on?

If you were watching the news yesterday you will have seen the FTSE100 index plummet by 4.7%. But that was just the headline. A fall of that magnitude would make you believe that the wheels have certainly fallen off the wagon. In the list above I have shown the 10 biggest fallers.

Now we did expect to see the Banks in there, but look at the rest of the names. With the exception of Burberry, they are hardly high street names. That’s because they are all mining stocks of some description. Without exception they are all companies highly geared to recovery. Not recovery here in particular, but recovery globally where the Far East keep using the raw materials to make things and the US keeps buying them. That is not recovery however; Recovery occurs with the Far East making and consuming. The West has to supply the knowledge and the services.

More interestingly not one of these shares is held in our UK share fund. So yesterday was an awful day for the FTSE100 index, but whilst it wasn’t a great day, it was by no means a disaster for the Vanguard FTSE UK Equity Index Fund.

10 largest stocks in the Vanguard Fund:

British American Tobacco
Glaxo Smith Kline
Imperial Tobacco Group
National Grid
Astra Zeneca
Vodafone Group

The FTSE100 index started at an arbitrary level of 1000 points in 1984. Since then it has been mostly up, but its highest ever level was around 7000 points at the end of 1999. Yesterday it was almost back down to 5000. In 2008 it dropped down to 3500. I have long believed this is much too volatile a place to hold clients money for the long term. I also believe as an indicator of how shares are doing generally, it is now too narrow a measure of the market generally.

It may be still called the FTSE100 index but it looks nothing like the FTSE100 index of 1984.

Would I ever invest in the FTSE100 again?

Of course I would. At these prices it has become a good buy. But I would not consider it a long term hold because of its volatility. We have been recommending to some of our more risk tolerant clients that below 5100 it is cheap, but don’t hang on to it beyond 5800, whenever that occurs.