Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

WHEN people say they invest in the UK, what most really mean is that they invest in the FTSE 100, the UK’s flagship index of its 100 largest companies.

The majority of us won’t have considered venturing down the “cap scale” to discover the FTSE 250, comprising the UK’s 250 next largest companies. That’s a shame, because investing exclusively in the FTSE 100 could have had a detrimental effect on your portfolio’s performance in recent years.

Consider the performances of the two indexes over the past few years. While the FTSE 100 is still languishing below its pre-pandemic levels, the FTSE 250 had clawed back all its lost ground by May this year.

Why the difference? Here’s Ed Legget, manager of the Select 50 Artemis UK Select Fund, explaining some of the differences between the indexes:

The crucial part is that “it’s easier for smaller companies to grow faster.” Or as one of the UK’s most famous investors Jim Slater used to say: “Elephants don’t gallop.”

Of course, it’s not always true that smaller is better. Big companies can grow too. Look to the States and you’ll notice that among its fastest growing companies are its largest - the Apples and the Amazons, for instance.

The UK’s big names have certainly struggled more than other regions’. In part, that’s because the FTSE 100 is dominated by commodities, financials, and consumer staples - sectors that hardly set pulses racing. Many are more concerned with distributing excess earnings out as dividends than reinvesting them into the business. That’s fine for income investors, not so much for those of us looking for capital growth.

Another crucial difference is their international feel - just 24% of the FTSE 100’s sales are domestic, compared with 51% of the FTSE 250’s.

That makes the FTSE 250’s performance more closely tied to the UK economy. It’s no surprise to see that today’s weak GDP data hurt the FTSE 250 more than it did the FTSE 100. Similarly, an ultra-weak pound (pushed to its lowest level against the dollar this year by Plan B news) is bad for the FTSE 250, but good news for those international companies whose overseas profits are boosted when converted to sterling.

These are vital differences that investors should consider before investing in the UK. Crucially, they tell us that our home market is far more diverse than most people think. Next time you check your portfolio, ask yourself: am I invested in the UK, or am I invested in the FTSE 100?

Five year performance

(%) As at 30 Nov

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
FTSE 100 2.6 -4.7 5.2 -14.7 12.7
FTSE 250 10.4 -7.4 12.6 -7.1 16.5

Past performance is not a reliable indicator of future returns

Source: Investing.com, price index in local currencies as at 30.11.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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