COMMENT
Is The UK Market Too Top Heavy?

In June, Shell (LSE: SHEL) is expected to finalise details of a scheme to scrap its dual-ownership structure. This will result in its shares having a single listing in London, rather than the current situation where its shares are split between London and Amsterdam. The move is likely to increase Shell's weighting in the FTSE 100 from 4% to 8%. The total weighting for the oil & gas sector will increase to almost 20%.

Earlier this month, when shares in Shell jumped 2.5%, the rise was attributed to heavy demand by fund managers ahead of the move. Funds that follow the index will be forced to buy more Shell shares. Some non-index funds will also be buying shares, as they will want to ensure that their holdings do not differ that much from the make up of the FTSE 100.

With banks already making up over 20% of the FTSE 100 index and telecoms and drug companies a further 10% apiece, this had led to many commentators expressing concern that the UK market is concentrated in too few sectors, making it a riskier place to put our money.

Market concentration is not a new phenomenon though. According to CSFB, in 1965 the oil & gas and general retailing sectors had a combined weighting of 32% of the top 100 companies. In 1990, telecom companies and banks commanded roughly the same weighting. In 2005, oil companies and banks rule the roost, albeit with a higher combined weighting.

What is interesting is how the dominant sectors have shuffled around. For instance, general retailers now account for around 4% of the index. Meanwhile, telecoms, which was non-existent as a sector in 1965, commanded an 18% weighting of the index at the end of 1999. Another sector that has shot up the rankings is pharmaceuticals. It has risen from less than 2% of the index in 1965 to about 10% today.

Looking through the list of the top ten sectors of 1965, only five have survived the test of time. Apart from oil & gas, general retailers and banks, the others are insurance and beverages. Chemicals, construction and tobacco have dropped out of the top ten to be replaced by mining, media and support services.

The important lesson here is that buying shares in the biggest companies does not necessarily equate to safety over the long term. After all, who knows which, if any, of this year's index heavyweights will still dominate in 2045! So actively refreshing your portfolio once in a while may be a good idea. This is one of the many reasons that we favour investing through low-cost index trackers, because its holdings are constantly being updated and refreshed without you having to do anything!

There's more about trackers here.

David owns shares in iShares FTSE 100, an exchange-traded fund that tracks the FTSE 100.