The FTSE 100 has a prestige deficit

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Lex features the FTSE 100 index, or at least its constituents, on an almost daily basis. Awkwardly, it was not always that way. 

When it was born 40 years ago, the index that would help revolutionise markets was initially named the “SE 100”. It was not until a rebrand over a month later to include “FT” that this column initiated coverage, dubbing the index “footsie to its friends”.

The FTSE 100 was originally conceived to help the London futures market offer more products. Lex noted it “should gain a following in the equity cash market as well”.

Its anniversary offers an opportunity for amusement at past understatements. But it also comes at a time of serious soul-searching for UK equity markets. The FTSE 100 and its sister indices will require fresh impetus to gee them up for the next 40 years. 

Membership of the FTSE 100 no longer holds the prestige it once did, even with the index money that now tracks its constituents. Despite angst at its lack of technology, traditionally strong areas such as natural resources have also dwindled in recent years. It trades at a 45 per cent discount to the S&P 500 on forward earnings, partly because of its lack of large tech companies. The discount to the MSCI world index, ex-the US, is smaller but still not inconsiderable at 19 per cent.

Companies such as Smurfit Kappa have highlighted that valuation gap in seeking to move their primary listings to New York. Weaker liquidity is also blamed for London missing out on big listings, such as that of UK chipmaker Arm last year. Problems are even greater in the mid and small cap market, which are a truer reflection of UK plc. Only 18 per cent of FTSE 100 members’ revenues are generated in the UK, reminds Liberum’s Joachim Klement. That compares with 52 per cent for the FTSE 250 and 70 per cent for small caps.

Once upon a time the cachet, and cash, attached to FTSE inclusion was seen as easily outweighing the governance strictures of joining the club of “premium” stocks on the London market. No longer. Changes to listing rules are undeniably chipping away at the shareholder protection the UK market once wore as a badge of pride.

The index itself, which has its own rules set by FTSE Russell, will need to keep pace with modernisation efforts. But that won’t address underlying challenges. Efforts to boost the flow of pension fund money into the market, while welcome, will not bear fruit quickly — with calls for more immediate action, including a “British Isa”, growing.

The truth is that no proposal in isolation can bring the quick fix that City reformers desire. But birthdays are a time to take stock — and the FTSE 100, born out of London’s desire to grow and succeed, needs that if it is to repeat the feat in the decades to come.