January 17, 2020

FTSE 100: Decade in Review

by Tajinder Dhillon and David Aurelio.

With a bull market over the last decade, global equities have provided strong returns for investors in most regions.  Exhibit 1 above highlights U.S. equities, as represented by the S&P 500, led global markets with a 13.6% annualized return over the last ten years.  U.K. multinationals also performed well, with the FTSE 100 achieving a 7.4% annualized return.

Interestingly, the performance of U.K. domestic equities, as represented by the FTSE 250, significantly outperformed the FTSE 100 over the last decade.  The FTSE 250 achieved a 12.0% annualized return, making it one of the leading indices globally.  The FTSE 250 also achieved a 2019 total return of 28.9% in comparison to a 17.3% return for the FTSE 100.

Analyzing the FTSE 100 in more detail using current constituents, exhibit 2 highlights annualized performance over the last decade for each sector.  Technology outperformed all sectors with an 18.1% annualized growth rate, having only two constituents in this sector (Aveva Group and Sage Group).  Basic Materials, Oil & Gas, and Financials were among the bottom performers with annualized growth rates of 2.9%, 5.1% and 5.2% respectively.  Within Oil & Gas, Royal Dutch Shell outperformed BP over the last decade, achieving an annualized return of 7.9% vs. 2.9%.  Basic materials suffered from weak commodity prices over the last decade, specifically copper, aluminum, nickel, platinum, and iron ore.

Exhibit 2: FTSE 100 Sector Performance

U.K. banks rank amongst the bottom performers within the FTSE 100 over the last decade, with three of the major banks appearing in the bottom five.  Exhibit 3 highlights Standard Chartered, Barclays, and Royal Bank Scotland experiencing annualized growth rates in the last decade of -4.4%, -1.0%, and -0.7% respectively.  Net interest margin (NIM), the difference between interest charged on loans and paid on deposits, is a key profitability metric for banks which has come under pressure given a decline in global growth expectations and a low interest rate environment.  An undesirable outcome related to Brexit will likely add further pressure on interest rates, impacting future profitability. U.K. business optimism is also at its lowest levels since the 2016 Brexit referendum.

The Datastream U.K. Banks index has underperformed the FTSE 100 significantly over the last 10 years.  The U.K. Banks Index has appreciated 1.3% on an annualized basis over this time period in comparison to 7.4% for the FTSE 100.

Exhibit 3: FTSE 100 Top/Bottom performers (current constituents)

To adjust for survivorship bias, we can also look at the top and bottom performers using the historical FTSE 100 constituents at the beginning of the decade which are still active today.

The top 5 performers are London Stock Exchange Group (LSE.L), Intercontinental Hotels Group (IHG.L), Ferguson (FERG.L), Legal and General (LGEN.L), and Compass Group (CPG.L) with annualized returns of 30.4%, 22.3%, 20.5%, 20.3% and 19.0% respectively.

The bottom 5 performers are Tullow Oil (TLW.L), Intu Properties (INTUP.L), Serco Group (SRP.L), Kaz Minerals (KAZ.L), Capita (CPI.L) with annualized returns of -24.3%, -17.6%, -8.5%, -8.1%, and -7.4% respectively.

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