How the FTSE turned £3,000 into £168,000

As the FTSE 100 stock market index hits its 35th birthday, fascinating research reveals...

IT WAS in 1984 that T- shirts proclaimed ‘Frankie says relax’ and the song that inspired this sartorial trend ( by Frankie Goes To Hollywood) reached the top of the pop charts.

It was also the year when the FTSE 100 index of Britain’s biggest publicly listed companies was launched.

Now almost 35 years on, we would be hard pushed to find many bands that are chart-toppers today. But the FTSE 100 boasts a surprisingly large band of survivors and thrivers.

The Mail on Sunday has gone back in time to find out how your money would have fared had you backed the country’s biggest companies at the index’s launch. With the help of investment platform AJ Bell, we have crunched the numbers to find the winners – and losers – from those who played FTSE in 1984.

To see how £100 invested in many of the top 100 companies at launch performed, check out the table opposite. Someone who cannily invested £100 in each of the 30 companies that are still listed on the stock market – either under the same name, new name, or in another index – would have seen their original £3,000 transform into a staggering £168,413. What a lesson in the power of the stock market to make you rich!

IMPORTANCE OF THE INDEX

THE FTSE stands for the Financial Times (and) Stock Exchange, the two companies that originally created the index. Nicknamed Footsie, it is made up of the UK’s biggest companies ranked by market capitalisation. This is a company’s value calculated by multiplying the total number of shares by the current share price. The minimum market ‘capitalisation’ to qualify for inclusion in the index 35 years ago was £100 million. Today, it is more than £4 billion.

At launch, the index was valued at 1,000. It peaked in May this year at 7,778.79, but Brexit nervousness has seen it slip, closing last Friday at 6,721.17. The index is vital because almost nearly everyone in the country will have a financial interest in the companies that comprise it – through their pension, Individual Savings Account or share portfolio.

Laith Khalaf, investment expert at broker Hargreaves Lansdown, says: ‘Though some people will have selected the companies, perhaps for their Isa or self-invested personal pension, many may not be aware these companies feature in their workplace pension. The performance of the FTSE 100 is therefore important because it makes a difference to the retirement prospects of millions of people.’

HIDDEN BENEFITS

THE index has endured several rocky periods – from Black Monday 1987, Britain crashing out of t he European Exchange Rate Mechanism in 1992, the financial crisis of 2008 ( see next page), through to the 2016 Brexit vote. In recent months, it has also faltered as a result of continued Brexit uncertainty and fears over the health of the world economy.

Today the index is roughly back where it stood at the turn of the millennium when the dotcom boom was raging – and before the bubble burst spectacularly in March 2000. The Footsie is, in effect, a weather vane for business, responding to political, economic and global events. But on closer inspection it is not a good measure of the longterm investment gains earned by investors.

Looking at the rise in the index as a whole, it would appear an average investment would have risen by only 6.8 times in 35 years – turning £100 into £670. This exposes the Footsie’s essential weakness – that it ignores all- important income. Hargreaves Lansdown’s Khalaf says: ‘On the surface, the FTSE 100 may look like it has gone sideways since 1999. But an investor would have, in fact, doubled their money if they had been shrewd enough to reinvest their dividends. Company dividends are a key component of overall return.’

Anyone worried about the FTSE’s recent bumpy performance as it responds to Brexit nerves should remember that it is the compounding of dividend income over time that is all-important.

That same £100 invested 35 years ago in the FTSE 100 Index would be worth more than £1,700 if dividend income had been reinvested.

To put this figure into some kind of perspective, data scrutineer Moneyfacts calculates that had you left £100 in the average easy access savings account over the same period it would now be worth £340.

Sophie Kilvert, chartered financial planner at wealth manager Seven Investment Management, highlights another reassuring aspect – that the money made by many FTSE 100

companies now comes largely from overseas earnings. This helps to reduce the impact of any downturn at home on the stock market. About 70 per cent of the earnings from the 100 biggest companies are now generated outside the UK.

THE SURVIVORS

OF the 100 companies comprising the index on launch day – January 3, 1984 – 30 are still listed on the stock market, give or take a name tweak or slippage into the lower rankings of the FTSE 250. Though some of these survivors have dropped out of the index and then rejoined at a later date, a select few have remained from day one, such as British Petroleum (BP).

The remainder of the founding club have either been broken up as a result of corporate activity, swal- lowed up or merged with another firm (for example, Cadbury was bought by US food conglomerate Kraft).

FOOTSIE FADS

THE index also reflects investment fashions that come and go. Russ Mould, investment director of AJ Bell, says the index has been a barometer of sectors that capture investors’ imaginations – even if the eventual financial outcome has sometimes been disastrous.

He says: ‘Between 1998 and 2000, a tech, media or telecoms (TMT) stock was promoted to the FTSE 100 Index on 25 occasions as the bubble boiled up. Between 2000 and 2002, some 22 tech stocks then sluiced straight out as the bubble burst. Since 2003, just ten TMT stocks have made it into the index – and they account for about 1 per cent of the index’s total market capitalisation.’

The next ‘bull-run’ – shorthand for when share prices head steadily upwards – was 2003 to 2007, led by banks and insurance companies.

After the financial crash of 2008, the subsequent recovery was driven by oil and mining firms as investors caught on to China’s economic growth potential. Currently, the FTSE 100 Index is heavily weighted towards banks, insurance and oils.

INVESTOR LESSONS

AS the distinguished US investor Warren Buffett wisely says: ‘You can’t buy what’s popular and do well.’ Mould goes further, stating ‘the latest fad can be bad for your wealth’. He adds: ‘Stock markets are not fruit machines. They are get- rich- slow mechanisms when used properly.’

He says finding the best future stock market performers involves choosing companies with sound finances, a clear strategy and a sense of purpose. Although the dividends currently offered by many FTSE 100 companies look attractive – and have proven to be the rocket fuel behind many investors’ portfolios – caution is required.

INVESTMENT FUNDS

THE best and cheapest way for investors to get exposure to FTSE 100 shares is through a fund that tracks the performance of the index. Major providers of such socalled ‘passive’ funds include Vanguard and BlackRock (iShares).

These funds do not have a manager at their helm – and they will always slightly underperform the index because of fees. Also, they do not protect investors from stock market downturns.

Apart from passive funds, many actively managed funds are wholly invested in the UK stock market. However, they will usually only have a slice of their portfolio in FTSE 100 shares.