MARKET COMMENT
Blue Chip Investors Should Be Beating The Market

By Maynard Paton (TMFMayn)
June 25, 2002

Ever since the new Millennium dawned, shares have been on the slide. On December 30th 1999, the FTSE 100 closed at a 6,930 peak. Since then, London's leading stock market index has dived 33% to 4,618. While all may seem doom and gloom, a significant number of FTSE 100 shares have done relatively well over the past two-and-a-half years.

Since the start of 2000, 33 members of the then FTSE 100 have recorded a positive total return (i.e. share price gain plus dividends) for their shareholders. The best performer has been Imperial Tobacco (LSE: IMT). The cigarette firm has rewarded investors with a 150% gain.

The 33 FTSE 100 shares that have moved ahead since December 30th 1999 are:

Alliance & Leicester  British American Tobacco  Reckitt Benckiser
Allied Domecq         Cadbury Schweppes         Reed Elsevier
Allied Zurich         Centrica                  Rentokil Initial
Anglo American        Diageo                    Royal Bank of Scot.
Assoc. British Foods  GUS                       Scottish & Newcastle
AstraZeneca           HBOS                      Scottish & Southern
BAA                   Hilton                    Tesco
Barclays              Imperial Tobacco          Thames Water
BG                    Land Securities           Unilever
Blue Circle           Marks & Spencer           Wolseley
Boots                 PowerGen                  Woolwich

Furthermore, another 31 members of the top tier have also beaten the FTSE 100 average since the start of 2000, albeit registering a negative return for their shareholders. That just leaves 36 shares that were in the FTSE 100 at the start of 2000 that have subsequently underperformed the index average. Given those statistics, the chance of a dart-throwing, buy and hold, blue chip investor beating the stock market over the past two-and-a-half years has been 64%.

That said, the 64% figure assumes any random FTSE 100 portfolio had an equal slice of each share. But of course, the FTSE 100 is a weighted index, where the movements of the larger companies have a proportionately greater influence over the index's general direction. The dire performance of the FTSE 100 can thus be attributed to a handful of larger companies losing a lot of their value. The following shares are amongst those to blame:

Company            Market Value              Market Value
                    30/12/1999                24/06/2002
                       (£m)                      (£m)

BT                    98,424                    24,408*
Vodafone              95,223                    59,623
Marconi               29,836                       121
Cable & Wireless      25,331                     3,931
Prudential            23,797                    10,975
Colt Telecom          20,892                       607
Invensys              12,463                     3,150
Pearson               12,226                     5,480
Telewest               7,532                        89
Railtrack              5,279                         0

(*includes mm02)

So what can we learn from all of this?

Firstly, don't get fixated on indices. They don't tell the full story of the stock market. Even during the worst portfolio conditions for twenty years, one in three FTSE 100 shares still made headway. Indeed, with only 36 underperformers in the index, most blue chip portfolios should have beaten the stock market average since the start of 2000.

Secondly, just because the market has fallen heavily already doesn't mean more heavy falls are on the way. Back in early 2000, the likes of BT (LSE: BT.), Vodafone (LSE: VOD), Marconi (LSE: MONI) and Cable & Wireless (LSE: CW.) all traded on price to earnings ratios of between 40 and 80. As their profit growth collapsed, those valuations suddenly looked very rich. While nobody knows the exact future profitability of the current FTSE 100 heavyweights, at least their market ratings are more down-to-earth.