In the first of an occasional series focusing on ‘untrue truisms’, we look at the commonly-held view that the FTSE 250 index is a better indicator of the UK’s economic health than the FTSE 100
Forget the ‘FTSE 100’ stock market index of the UK’s very largest companies – it is the next block of 250 biggest British businesses that has been attracting the headlines of late.
Already this year, the FTSE 250 index has racked up not one but three all-time highs – a purple patch some commentators have taken as evidence the UK economy is thriving and, in some cases, even as an endorsement of Brexit.
Even the Financial Times has occasionally chimed in – observing, for example, in FTSE 250 hits record high: “Unlike the FTSE 100, which is dominated by multinational companies and sensitive to swings in sterling and commodity prices, the FTSE 250 is considered to be a better reflection of the health of the UK economy.”
This seems to have become an investment truism and yet, like many investment truisms, it just isn’t true.
We used the word “occasionally” above because, as evidence to support our argument, we are going straight to another Financial Times article.
Dated 22 February 2017 and headlined Performance since Brexit vote tests FTSE 250 ‘UK barometer’ tag, it offers a breakdown of the top and bottom-performing businesses in the FTSE 250 since the Brexit vote of 23 June 2016.
The best performer was, by some distance, Ferrexpo – a Swiss-based iron ore producer that has extensive operations in Ukraine – and in fact mining companies, which are hardly synonymous with the UK these days, made up six of the top 10.
Yes, these businesses will have been helped by the rebound in commodity prices over the last year – but, then again, that is an argument more usually associated with FTSE 100 mining giants.
The first business in the FT’s list to generate its revenues within the UK was Metro Bank (pictured below) – in eighth place – and the reality is that FTSE 250 businesses now generate half their revenues overseas.
That is still some way short of the corresponding 70%-odd figure for FTSE 100 companies – albeit closer than many might expect – but would still suggest the weaker pound since Brexit has been a significant boost for both indices.
In a way, you can understand how this particular misconception has arisen – after all, it sort of feels instinctively right the UK’s 100 largest companies should be more international than the rest of the market.
But as value investors, we have learned to be suspicious of feelings and instinct – and indeed of sweeping statements that can happily tar 250 different businesses with the same brush.
Pockets of value can be found anywhere – even within markets that are pushing all-time highs – but to stand much chance of identifying them, investors need to be wary of taking easy explanations at face value. As we never tire of saying – most recently in Just one more reason – there is really no substitute for forming your own opinions through carrying out your own research.
- Andrew Williams is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.
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