MARKET COMMENT
Beware Of Buy And Forget

By Maynard Paton (TMFMayn)
April 25, 2003

Shares are at a 14-year low. Not according to the FTSE 100 though, which is currently trading at levels first witnessed in 1996. No, we're talking the FT 30, an index most investors have long since resigned to the stock market dustbin. Prior to this year, yesterday's FT 30 close of 1,442 was last seen during late 1988.

But who cares about the FT 30? Isn't it an index where the constituents are handpicked and hardly ever change anyway, so leaving it full of dodgy old smokestack stocks whose best days have been and gone? Exactly. You see, the FT 30's woeful performance highlights the potential danger of passive, no-dabble portfolios.

The current FT 30 comprises of:

Allied Domecq              GlaxoSmithKline
BG                         Granada
Boots                      ICI
BP                         Invensys
BAE Systems                Lloyds TSB
British Airways            LogicaCMG
British American Tobacco   Marks & Spencer
BT                         Prudential
Cadbury Schweppes          Reuters
Carnival                   Royal & Sun Alliance
Compass                    Scottish Power
Diageo                     Tate & Lyle
EMI                        Tesco
GKN                        Vodafone

The most recent changes were:

* Logica (now LogicaCMG (LSE: LOG)) replacing SmithKline Beecham (Dec 2000);
* Compass (LSE: CPG) swapping with Blue Circle (July 2001), and;
* British American Tobacco (LSE: BATS) substituting Marconi (LSE: MONI) (Sept 2002).

It's not entirely clear what grounds particular stocks get into the index when another disappears (or is on the verge of bankruptcy), other than to broaden the spread of sectors covered. While the FT 30 has seen three changes since December 2000, the FTSE 100 has witnessed over 30 promotions and relegations. How have the two indices fared over that period? FT 30 down 60%, FTSE 100 down 38%.

Now consider January 1984 and the launch of the top 100 index. The FTSE 100 kicked off at 1,000 when the FT 30 stood at 803. Nineteen years on, the FTSE 100 has improved 290% compared to the FT 30's 80% gain.

The dreadful performance is not surprising, since dogs like British Airways (LSE: BAY), EMI (LSE: EMI), ICI (LSE: ICI), Invensys (LSE: ISYS) and Royal & SunAlliance (LSE: RSA) have long been FT 30 mainstays. Unfortunately, these perennial under-performers are likely to stay put in the index; Marconi was only ejected from the FT 30 when its market value hit £45m.

As well as poor capital gains, another shocker comes from dividend income. Anybody looking for a broad spread of high yield blue chips could have invested £1,000 in the FT 30 in January 1991 and received dividends knocking on for £60 a year. As well as the capital shrinking to around £895, annual dividend income would now be around £38.

The simple lesson? Like the FTSE 100, investors must run their winning companies and prune their losers to succeed.

More: FT 30 constituents

The author owns shares in GlaxoSmithKline.