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FTSE’s millennium gloom hides boom for UK stock pickers

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FTSE’s millennium gloom hides boom for UK stock pickers

Even before yesterday's stock market meltdown, the FTSE 100 had fallen below the 6,930 level it reached at the height of the dotcom bubble at the turn of the millennium.

Thursday's 218-point plunge dragged it further below that level, and notwithstanding  today's fightback, it remains more than 100 points shy.

That miserable record makes for an eye-catching headline and feeds into the narrative of the UK stock market being, at best, a boring place to invest and, at worst, a downright bad one.

It's a view that's gained currency over the last two years. As exciting tech stocks in the US and China have soared to ever-more exorbitant valuations (until recently), the UK stock market has remained mired under a Brexit cloud.  

Investors have voted with their feet: figures from the Investment Association this week took the scale of outflows from UK-focused funds since the Brexit vote to £10.8 billion.

Yet the fact that the UK's main stock market index has failed to make any ground since the turn of the millennium does not tell the full story.

The headline index doesn't include the dividends paid by the UK blue-chips, which, as the UK stock market is traditionally among the highest yielding of the major global indices, are substantial. It's a rejoinder that gets trotted out every time that dotcom high is invoked, but that doesn't diminish its truth.

With dividends included, the FTSE 100 has delivered an 88% total return since the the turn of the millennium. Still not a great return over nearly 18 years, but better than nothing.

Even that doesn't give us the full picture of the actual experience of investing in the UK stock market, however, as Laith Khalaf, analyst at Hargreaves Lansdown, points out.

No investor in UK equities, even those who adopt a passive approach, is actually buying the index. If they are buying funds, they are either buying one run by a manager who is trying to beat the index, or a tracker fund that aims to replicate it as best it can, with the real-world complications of dealing commissions, stamp duty and fund charges.

'The methodology for creating the FTSE indices takes no account of the costs of investing. The indices are essentially, a frictionless, idealised version of UK stock market returns,' said Khalaf.

Then there's the fact that the FTSE 100, for all that its movements tend to be the ones that lead the news, is less useful as a representation of UK investor returns than the FTSE All-Share, which includes the 'mid-caps' of the FTSE 250 and 'small-cap' companies.

FTSE All-Share tracker funds are more popular than those seeking to replicate the FTSE 100's returns, and managers running mainstream active UK equity funds won't tend to confine themselves to UK blue-chip stocks.

The FTSE All-Share's return, including dividends, is 115% since the turn of the millennium, beating the FTSE 100 thanks to the stronger returns of mid- and small-cap companies.

Over the same period, the average return from funds in the UK All Companies sector is just behind that.

Not a great advert for active fund management on the face of it, given fund managers have, on the whole, failed to beat the index, albeit by a small margin.

Although, just as no investor buys the index, neither do they buy the average fund. And a look through the individual funds that have contributed to that overall performance shows it's not just the fault of active managers.

Yes, there are some miserable returns from active UK funds over that period: step forward Legg Mason IF QS UK Equity, which none of the seven managers at the helm of the fund over the period have managed to lift from the bottom of the sector, returning just 44%, according to Lipper.

But clustered at the bottom of the sector are a host of tracker funds, in many cases dramatically lagging the returns of the index they are seeking to replicate. Take the Halifax UK FTSE 100 Index Tracking fund's 48% return, or the bank's UK FTSE All-Share Index Tracker fund, which has delivered 75%.

Total expense ratios this year of 1.05% and 1.03% respectively, according to Lipper, explain why these funds have such poor records.

Charges attached to passive funds have come down dramatically since, meaning you could pay as little as little as 0.04% for an exchange-traded fund tracking FTSE 100 and FTSE 250 shares.

Strip the 15 tracker funds with records stretching back to the turn of the millennium out of the UK All Companies sector, and you are left with 48 active funds out of 80 beating the index return. 

Then there are the top performers, to which money flocked: Fidelity Special Situations, run by legendary investor Anthony Bolton from 1979 until the end of 2007 but now under the watch of Alex Wright, is up 480% since the turn of the millennium and topping the sector.

To hammer home the point that there's been money to be made from UK stocks over the last 18 years, despite the FTSE 100's glum performance: if you were picking a fund to invest in on 31 December 1999, the absolute best choice you could have made, of the 598 funds in the various Investment Association sectors that have survived since then, was a UK one.

Marlborough Special Situations, run by Citywire AAA-rated Giles Hargreave over that entire period, has delivered 935%. 

Of the five funds that have come closest, three are, like the Marlborough fund, focused on UK smaller companies.

All of which doesn't underplay the problems faced more recently by UK investors. As our exclusive Accumulator data table shows, the FTSE 100 is now down 9.2% for the year after yesterday's slump.

Yesterday's heavy stock market fall wiped out 2018 gains for the only three UK equity income funds that had remained in positive territory for the year: Schroder Income, Livingbridge UK Multi Cap Income and Schroder Income Maximiser.

Within the UK All Companies sector, six funds fell into the red for the year, leaving just four with positive 2018 returns, and among UK smaller companies funds, the number dropped from four to three.

It's been a difficult year. But despite the headlines highlighting the FTSE 100's troubles, it's so far been a great century for many investors in the UK stock market. 

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