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The Times (UK): Tempest: How trackers can lose out with the lopsided FTSE: “SHELL may be moving its headquarters away from London’s South Bank to the Netherlands, but the most significant decision taken by the oil major this week was to shift its primary listing to London.” (


By Dan Sabbagh

30 Oct 04


SHELL may be moving its headquarters away from London’s South Bank to the Netherlands, but the most significant decision taken by the oil major this week was to shift its primary listing to London. The change will see about £60 billion of value transfer across the North Sea next year, and increase Shell’s weighting in the FTSE 100 from 3.5 per cent to 8 per cent.


As a result, the FTSE 100 will be more oily than ever — nearly a fifth of its value will derive from the oil and gas sector, for which read BP, Shell and, for good measure, the rather smaller BG Group too.


Yet, while BP and Shell will vie for the title of Britain’s biggest company, the largest portion of the FTSE 100 — which is weighted by the size of a company’s freely floating stock — is devoted to banks. The high street clearers and their challengers take up more than 20 per cent of the top-flight index, and once the oil and gas merchants are thrown in, 40 per cent of the FTSE 100 is dominated by just two sectors of the economy.


Yet most people would be forgiven for thinking that the FTSE 100 is some kind of proxy for the state of the whole economy. The index is relentlessly cited in media bulletins as a summary for that day’s business news, in the hope that its movements tell us anything.


In reality, today’s FTSE 100 is a commentary on the oil price and the health of the mortgage market, which is where the banks make most of their money. But it is still followed mindlessly by legions of tracker funds, for which performance relative to their rivals is all that matters. Unfortunately, as Warren Buffett once observed: “You can’t eat a relative performance sandwich.” In the real world, only absolute growth matters.


The FTSE 100 does not have to be like that. In the United States, despite the presence of Exxon Mobil and Citigroup in the top echelons, banks and natural resources groups represent less than 30 per cent of the 100 largest companies, essentially because America has a large base of IT and industrial stocks. London, in contrast has no answer to Microsoft or General Electric. Figures that move the US market, such as book-to-bill ratios for semiconductor makers, have almost no meaning over here.


Unfortunately, for those dependent on the FTSE 100, the near-term prospects for the index look poor. The recent series of interest rate rises finally looks like choking off demand in the mortgage market — bad news for bank profits — while, in the short term, the oil price is likely to ease — witness the sharp fall this week.


Of course, there is a little more to the London picture, but it only serves to reinforce the lopsided nature of the FTSE 100. Pharmaceuticals, aka GlaxoSmithKline and AstraZeneca, contribute another tenth of the weighting, which is hardly reassuring as drugs seem to have stopped working lately. Telecoms — essentially Vodafone — represent another tenth. Vodafone has enjoyed a modest rally this autumn, largely because there seems to be no massive acquisition on the go. Hopefully, people will start to buy third-generation fast internet mobile phones in numbers, although it is unlikely that this, even if it happens, will be enough to prop up weakness in the other major sectors.


So, rather than buying a £199 phone, the best solution for investors is an active approach. The FTSE 100 is home to plenty of companies outside the big four sectors that have earnings growth above 10 per cent and a price-earnings ratio of between 10 and 14 times.


Some, such as Marks & Spencer and BAE Systems, are risky recovery plays. Others, though, are established quality businesses, such as Centrica, the utility provider, which trades at just above ten times earnings. Hilton Group, owner of Ladbrokes, and rival William Hill trade at about 11 times and are growing quickly, as long as the Government continues to liberalise gambling rules. Other cheap stocks include Kingfisher, the Anglo-French electrical retailer, BAA, the airports operator, and Smiths Group, the engineer.


All these would form the basis of a long-term portfolio that is likely to be of more value than a straight punt on the banks and oil-dominated FTSE 100.

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