QUALIPORT
Investing Lessons Of The Last Forty Years

By Maynard Paton (TMFMayn)
January 18, 2005

Investing lifetimes typically span forty years or so -- from those first tentative share purchases made in your twenties to retiring on the subsequent capital growth in your sixties. But how can the make-up of the stock market alter over such a period?

Extracted from Bloomberg and the 2000 edition of Credit Suisse First Boston's Equity-Gilt Study, the following table highlights how the market values and weightings of every sector have changed since 1965. The statistics cover the top 100 companies as at 1 January 1965 and 1 January 2005 and the sectors used are the categories applied currently by FTSE:

Sector	Value 1 Jan 1965 (£m)	Weighting 1 Jan 1965 (%)	Value 1 Jan  2005 (£m)	Weighting 1 Jan 2005 (£m)	Annual increase 1965-2005 (%)
Aerospace & Defence	79	0.7	15,665	1.4	14.1
Automobiles & Parts	332	2.7	0	0	n/a
Banks	698	5.8	266,678	23.2	16.0
Beverages	543	4.5	40,248	3.5	11.4
Chemicals	977	8.1	9,881	0.9	6.0
Construction & Building Materials	569	4.7	8,860	0.8	7.1
Diversified Industrials	42	0.3	0	0	n/a
Electricity	0	0	14,782	1.3	n/a
Electronic & Electrical Equipment	533	4.4	0	0	n/a
Engineering	193	1.6	0	0	n/a
Food & Drug Retailers	34	0.3	33,293	2.9	18.8
Food Producers	789	6.5	29,954	2.6	9.5
Forestry & Paper	52	0.4	0	0	n/a
General Retailers	1,748	14.5	34,211	3.0	7.7
Health	0	0	4,958	0.4	n/a
Household Goods & Textiles	340	2.8	0	0	n/a
Info Tech Hardware	0	0	0	0	n/a
Insurance	573	4.7	2,238	0.2	3.5
Investment Companies	348	2.9	4,040	0.4	6.3
Leisure & Hotels	394	3.3	22,517	2.0	10.6
Life Assurance	381	3.2	39,915	3.5	12.3
Media & Entertainment	151	1.2	42,578	3.7	15.2
Mining	150	1.2	54,410	4.7	15.9
Oil & Gas	2,107	17.4	165,238	14.4	11.5
Personal Care & Household Products	88	0.7	10,868	0.9	12.8
Pharmaceuticals & Biotech	191	1.6	107,098	9.3	17.1
Real Estate	48	0.4	14,139	1.2	15.3
Speciality & Other Finance	0	0	8,814	0.8	n/a
Software & Computer Services	0	0	2,559	0.2	n/a
Steel & Other Metals	0	0	2,215	0.2	n/a
Support Services	156	1.3	16,824	1.5	12.4
Telecommunication Services	0	0	122,959	10.7	n/a
Tobacco	522	4.3	29,781	2.6	10.6
Transport	59	0.5	10,776	0.9	13.9
Utilities (ex-Electricty)	0	0	32,180	2.8	n/a
Total/average	12,096	100	1,147,680	100	12.1

Over the last forty years, the market value of the top 100 companies has jumped from £12b to £1,148b -- an improvement averaging 12.1% a year. The big sector winners over the past forty years have included Banks, Food & Drug Retailers, Mining and Pharmaceuticals & Biotechs. These industries have harboured some amazing long-term buy and hold stories, including:

* Royal Bank of Scotland (LSE: RBS) (1965 index position: 82nd), which has developed from a £41m firm to one worth £55b (average annual growth: 20% per annum);
* Glaxo Holdings (1965 index position: 52nd), which has progressed from a market value of £64m in 1965 to become GlaxoSmithKline (LSE: GSK) with a market value of £71b (average annual growth: 19% per annum);
* Tesco (LSE: TSCO) (1965 index position: 94th), which has advanced from a market value of £34m to £26b (average annual growth: 18% per annum);
* Rio Tinto (LSE: RIO) (1965 index position: 40th), nee RTZ, which has expanded from an £87m to a £16b valuation (average annual growth: 14% per annum).

Certain leading companies of 1965 remain leading companies in 2005 too. Among the ten largest firms forty years ago, the following have registered decent progress.

* Shell (LSE: SHEL) (1965 index position: 1st), expanding from a £955m market value to £43b;
* BP (LSE: BP.A) (1965 index position: 3rd), transforming from a £856m company to one worth £110b;
* Unilever (LSE: ULVR) (1965 index position: 8th), emerging as a £15b company from one valued at £311m;
* British American Tobacco (LSE: BATS) (1965 index position: 10th), now valued at £19b in contrast to £296m forty years ago.

Sectors underperform

However, most industries that were represented in 1965 have since gone on to underperform over time. The eleven outperforming sectors are outnumbered by 16 industries that have trailed the market's overall expansion.

Among the laggards are six industries that have disappeared entirely from today's ranks of blue chips: Automobiles & Parts, Diversified Industrials, Electronic & Electrical Equipment, Engineering, Forestry & Paper and Household Goods & Textiles.

Other disappointments include General Retailers and Chemicals. At the start of 1965, these were the second and third largest sectors in the stock market. But at the start of this year, General Retailers was the ninth largest and Chemicals ranked a rather sorry number 21.

(Admittedly, spinning off Zeneca (since merged to form AstraZeneca (LSE: AZN)) in the early 1990s complicates the figures somewhat for ICI (LSE: ICI) (1965 index position/market value: 2nd/£904m) and the Chemicals sector, but the statistics generally paint a bleak picture for long-time holders of the former industrial bellwether.)

Furthermore, Construction & Building Materials, Food Producers & Processors, Insurance and Investment Companies have seen their representation within the market's top tier reduce significantly over time.

Company laggards

Those sectors falling behind the market's expansion contain some of the longer-term disappointments. Of the companies within the top 100 in 1965 and still going today, notable laggards include:

* Marks & Spencer (LSE: MKS) (1965 index position: 5th), which has seen its market value expand by just 7% a year (from £377m to £5.6b);
* Once known as General Electric and now Marconi (LSE: MONI) (1965 index position: 27th), which has seen its market capitalisation grow from £116m to £1.1b during four decades. That said, the massive debt-for-equity swap the other year gave then shareholders a holding now worth under £6m(!);
* Charter (LSE: CHTR) (1965 index position: 61st), which is now valued at £349m compared to £52m forty years ago;
* House of Fraser (LSE: HOF) (1965 index position: 62nd), which was valued at £52m in 1965; the market cap now is £272m;
* Delta (LSE: DLTA) (1965 index position: 55th), which had a market value of £63m forty years ago; today the group is worth £151m.

Among the 100 leading companies at the start of 1965 that no longer enjoy a listing, CSFB highlights Alfred Herbert (1965 index position: 93rd), a machine tool manufacturer, as a particularly poor performer. It was nationalised at 6p per share in 1975, having been quoted ten years earlier at 210p and worth £34m.

Other long-term strugglers no longer with us (in listed form at least) include Bowater Paper (1965 index position/market value: 37th/£90m), British Home Stores (97th/£32m), Burmah (9th/£296m), Courtaulds (11th/£229m), Dunlop Rubber (35th/£98m) and Marley Tile (74th/£44m). According to CSFB, all six underperformed the market by at least 80% up until their index removal.

New sectors

Where investors may have lost out over the past forty years is by not exposing themselves to emerging industries. Today, over 16% of the FTSE 100 is represented by sectors that had a zero weighting in 1965.

Telecommunication Services, for instance, has been a high-profile newcomer, with the creation of Vodafone (LSE: VOD) and the privatisation of BT (LSE: BT.A) helping to garner an 11% market weighting from nothing forty years ago.

Privatisations also brought the arrival of utilities to investors' radars. State-owned in 1965, gas, water and electricity groups now account for 4% of the FTSE 100. Other areas unheard of four decades ago include Health, Software & Computer Services and Speciality & Other Finance.

Conclusion

There are some obvious caveats with the statistics. There is no accounting for dividends, while mergers, demergers, acquisitions, flotations, rights issues and a whole host of other corporate actions will distort the data. Nevertheless, some things are quite apparent.

Clearly investors should not expect the FTSE 100 to look anything like today's index in 2045. Of the top ten sectors in 1965, only three (Banks, General Retailers and Oil & Gas) remain in the top ten in 2005. Tomorrow's winners are more likely to come from today's less established areas.

In addition, big companies do not necessarily last the test of time. As this table shows, only six of the top twenty shares in 1965 remain in the top twenty today:

Rank	Company 1 Jan 1965	Value 1 Jan 1965 (£m)	Company 1 Jan 2005	Value 1 Jan 2005 (£m)
1.	Shell	955	BP	108,892
2.	ICI	904	HSBC	96,772
3.	BP	856	Vodafone	92,411
4.	FW Woolworth	427	GlaxoSmithKline	71,328
5.	Marks & Spencer	377	Royal Bank of Scotland	55,020
6.	Distillers	359	Shell	42,338
7.	GUS	315	Barclays	37,564
8.	Unilever	311	HBOS	32,652
9.	Burmah	296	AstraZeneca	31,171
10.	BAT	296	Lloyds TSB	26,064
11.	Courtaulds	229	Tesco	24,469
12.	Imperial Tobacco	227	Diageo	22,231
13.	Royal Insurance	204	Anglo-American	18,087
14.	Barclays	193	BT	17,204
15.	British Shoe	192	Rio Tinto	16,159
16.	Guest Keen & Nettlefolds	178	National Grid Transco	15,184
17.	Midland Bank	169	BHP Billiton	14,920
18.	Prudential	156	Unilever	14,748
19.	Blue Circle Industries	150	BAT	14,392
20.	Lloyds Bank	133	Aviva	14,197

The rest have either been gobbled up or fallen behind in the market rankings. The aforementioned progress of Marks & Spencer, General Electric, Burmah and Coutaulds in particular should be enlightening (and alarming!) to long-term, hands-off, investors.

Given all this, CSFB's own conclusion is very sensible: "It could be wrong to assume that long-term equity investing in big 'quality' companies is safer, particularly if the investments are to be left dormant. This does not suggest that long-term equity investors need to trade their portfolios actively, but an element of portfolio management would seem sensible. Passive funds that track equity indices may well be active enough."

Maynard owns shares in GlaxoSmithKline. He hopes to hold them for the next forty years.

Portfolio value

Holding	Number of shares	Closing price 17/01/05 (p)	Value (£)
Associated British Ports	681	476	3,241.56
Emap	372	811	3,016.92
Halma	1,920	159	3,052.80
Johnston Press	1,608	537.5	8,643.00
London Stock Exchange	2,018	580	11,704.40
Cash			157.53
Total			29,816.21