What’s under the bonnet?

With more and more tech companies listing elsewhere, has the UK lost the investing race?  Or is it simply the tortoise in this tale?

•The FTSE100 Index of leading UK companies reached an all-time high at the beginning of 2023. In contrast, the S&P500 Index of leading US names is around 15% lower than the all-time highs it achieved in late 2021.

•Incidentally, in late 2021, the FTSE100 had only just recovered to pre-Covid levels, while the S&P500 was over 40% higher.  

•There are many reasons for this level of difference, and it’s important to understand the underlying construction of equity indices.

•Both indices are market capitalisation weighted indices, where the largest companies receive the largest allocation.

•On one hand, the S&P500 is dominated by the Information Technology sector (compared to the UK). So when technology and growth stocks led the rally in 2021, the US outperformed, and the UK lagged.

•In contrast, towards the end of 2022, sectors that are typically defensive in nature (such as Consumer Staples and Financials) rallied strongly into the year end.

•With the FTSE100 substantially overweight these sectors compared to the S&P500, UK stocks are outperforming this year.

• Despite the government’s stated objectives, London’s struggle to attract (e.g. ARM) or retain (e.g. Flutter) tech companies impacts the domestic UK universe available to investors, and therefore portfolio allocation decisions.

•Where companies decide to list has a direct impact on index construction, and, by extension, passive investing returns.