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.

THE FTSE 100 Index ended September on a positive note, despite concerns about supply chain bottlenecks and rising inflation. A weaker pound helped fend off the gloom. Around three quarters of the revenues of FTSE 100 companies come from overseas, which boosts earnings when the pound is weak.

That though may be of little recompense to long term investors in the FTSE 100, who have seen share prices languish by comparison with foreign markets since the dotcom era. The plain truth is the FTSE 100 ended September a miserly 2.3% above its 1999 peak1.

There are some extenuating circumstances. First, the Index was vastly overvalued in late 1999. It isn’t any more. The FTSE 100 is trading at just 13.5 times the earnings companies are expected to make over the next 12 months – well below multiples of 22 and 18 times for the US and Europe respectively2.

Second, comparing the level of the Index in 1999 with today misses one crucial factor: The value of all the dividends paid by FTSE 100 companies over the course of the past two decades. The Index has historically paid out more than overseas markets and currently yields a relatively attractive 3.3%3.

However, there’s no hiding from the fact that the FTSE 100 has disappointed investors over the longer term. Its makeup counts against it in a world where the big gains this century have come from stocks primarily driven by new technologies.

Past FTSE 100 technology constituents like ARM Holdings, Bookham Technology and Racal Electronics have long since left the Index following foreign takeovers and they’ve not been replaced with anything comparable. Ocado has pretty much been the only rising star.

Today, technology comprises account for just 1.8% of the Index. That’s a paltry amount, especially when compared with weightings of approximately ten times as much in slower growing, more defensive financials and consumer staples4.

Fortunately, investors can access a much larger universe of UK companies in the real world. Many actively managed UK equity funds select their investments from the FTSE All-Share Index, a combination of the FTSE 100, FTSE 250 and FTSE Small Cap indices.

That’s a good thing, as medium and smaller sized company stocks have demonstrated an ability to significantly outperform blue chips since the FTSE 100 peaked in December 1999.

Fidelity’s Select 50 list contains several UK equity funds able to invest across the company size spectrum. The Fidelity Special Situations Fund, for example, seeks to deliver capital growth by investing in unfashionable areas of the stock market and focuses on companies undergoing positive change.

It looks well positioned for today’s environment, with large investments in the insurers Aviva and Legal & General which, among other things, own investments in long-dated assets like infrastructure and the green economy. The fund also has a large position in Inchcape, currently benefitting from a strong pricing environment amid short supplies of new and used cars.

The Fidelity Special Situations Fund is among Tom Stevenson’s five fund picks for 2021.

Five year performance

(%) As at 30 Sept 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
FTSE 100 11.2 6.1 3.2 -18.1 25.4

Past performance is not a reliable indicator of future returns

Source: FE, total returns in GBP as at 30.9.21

Source:

1 London Stock Exchange, 30.09.21
2 FTSE Russell, 02.07.21
3,4 FTSE Russell, 31.08.21

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 a Fidelity adviser or an authorised financial adviser of your choice.

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