The year the FTSE 100 almost changed a 15-year habit

The FTSE 100 has spent the past 15 years unsuccessfully seeking its record 6,930 peak, and has slipped even further this year.

Despite clawing close three times in 2014, the FTSE is currently trading at 6,610, down from 6,749 as at 31 December 2013.

On 24 February the market closed at 6,865 and on 14 May it went even higher to 6,878. After going sideways for the summer, it hit 6,878 again on 3 September before slumping almost 10 per cent in October.

The sustained drop in oil prices sent the FTSE even lower this month, but the index has since bounced back somewhat.

Hargreaves Lansdown senior analyst Laith Khalaf says it is wrong for people to look at the FTSE 100’s performance and think it was pointless to invest in UK shares over the past 15 years.

A £10,000 investment in the FTSE All Share in December 1999 – “the worst possible time” – would still be sitting on £17,206 today after accounting for accumulated dividends, he explains.

“That said, it has been a white knuckle ride at times, encompassing the tech crash, the global financial crisis and two bull markets,” he says.

“But despite all that, the equity market has delivered significant returns ahead of inflation for long term investors.”

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The All Share’s outperformance is boosted by the exposure to small and medium sized companies, as well as the inclusion of dividends.

A £10,000 punt on the FTSE 250 would have grown to £36,306 in the 15 years since December 1999, Khalaf calculates.

Despite that, UK gilts have been king over the last 15 years, easily outstripping UK equities. Government bonds, with interest reinvested, returned 136 per cent over the period.

Khalaf argues some “important perspective” needs to be kept in mind while assessing the differing returns.

“Starting as we are at the peak of the market in 1999, we are selecting a very poor period for equities,” he says.

“We are also selecting a very flattering period for bonds, which starts with a prolonged flight to safety and also included the global financial crisis and the losses monetary policy that has driven gilt prices to historic highs.

“This is effectively a snapshot of how bad it can get for an equity investor, and how good it can get for a bond investor, rather than a typical example of the comparative returns from these asset classes.”

The ever-changing FTSE 100

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The FTSE 100’s composition has changed markedly in the past 15 years with the country’s technology companies shrinking, to be replaced by mining.

A massive skew toward telecommunications companies has been eroded, with many now in private hands or the clutches of foreign-listed groups. Banking’s share has also fallen back over time, surrendering ground to the expanded oil and gas majors.