The long-term performance of Britain's oldest index is dreadful. Here's why.
Do you follow the fortunes of the FT 30 index? You should. Superseded by the FT Actuaries series in 1962 and the FTSE 100 in 1984, the woeful performance of Britain's oldest index provides important lessons for long-term investors.
Here's a taster of how bad the FT 30 has proved to be:
* Started in 1935 at a base level of 100, the FT 30 index would now stand at roughly 3,700 had it increased in line with inflation. In reality, the index currently trades around 2,568.
* The FTSE 100 was launched in 1984 when the FT 30 stood at 803. The FTSE 100 has since improved almost six times to 5,851, while the FT 30 has increased only three times.
* The FT 30 first achieved its current level in late 1993. Back then, £1,000 in the index would provide about £36 in dividends. Nowadays, it delivers a payout of about £31.
The calculation and membership selection behind the FT 30 has caused the long-term underperformance.
You see, the FT 30 is calculated every day with each of the 30 constituents having an equal weighting. In effect, the index 'top slices' its winners and 'averages down' on its losers.
There is a lack of fresh blood, too. Membership changes occur on an ad-hoc basis, with the search for new constituents triggered only by takeovers, mergers or failures.
So when you think the FT 30 has over time essentially reduced its holding in long-term successes such as Tesco
(LSE: TSCO)
and upped its exposure of long-term laggards such as Invensys
(LSE: ISYS)
(or outright disasters such as Marconi!), it's perhaps not surprising the index has gone nowhere in thirteen years.
Given the comparative performance against the FT 30, it would make much more sense to run a portfolio along the lines of the FTSE 100.
The blue-chip index is calculated on a market capitalisation basis, which means the larger the company is, the more effect its shares have on the index. The FTSE 100 also undergoes a quarterly reshuffle, whereby poorly performing businesses can be dropped from the index. Thus the 100 is more likely to run long-term winners such as Tesco and eject long-term losers such as Invensys and Marconi.
All things considered, it seems the tips from the FT 30 to long-term investors are:
* Don't bother re-balancing your portfolio to ensure equal weightings, and;
* Run your winners and ditch long-term losers.
Maynard Patonis the editor ofChampion Shares, the Motley Fool's share-tipping service. Try it -- for free! -- through this 30-day trial. There is no obligation to pay and the trial can be cancelled at anytime -- no questions asked. The trial provides full access to every recommendation and subsequent update, as well as numerous other share ideas!Free share tips are just a click away.
