Analysts say a lot of pleasant things about GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). They remark upon its size and its solidity. They name it as a core portfolio holding, a building block for your long-term wealth. The ultimate ‘buy and forget’ stock. What does that sound like to you? To me, it sounds like the sales pitch for a FTSE 100 tracker fund.
Now that’s not necessarily a bad thing. I hold Glaxo, and I hold a tracker fund, the HSBC FTSE 100 Index. Both have served me well. But why hold both? After all, 4.4% of my tracker fund is actually made up of Glaxo, with its massive £80 billion market cap. The tracker gives me a dab of exposure to Glaxo’s steady, solid upside, while protecting me against its occasional excesses, such as the small matter of a Chinese bribery scandal. Do I really need to own the stock itself?
Risk, Reward And R&D
As with any individual company holding, there are greater risks than buying the whole index. Glaxo’s drugs pipeline may dry up. It may suffer a string of late-stage failures. The share price may tumble off a patent cliff. Reputational damage from China could prove more severe than expected. On the other hand, there are potentially higher rewards, if Glaxo outperforms, say, because its recent strong run of R&D approvals continues, management continues to drive down costs, or emerging market sales continue to outperform. So no, it’s more than a tracker.
Does Glaxo offer greater defensive capabilities than the index, a reason often touted for holding this stock? To a degree, yes. As the table below shows, during the market meltdown of 2008, Glaxo fell around 22%, but my tracker fell nearly 29%. More impressively, in 2011 the FTSE 100 dropped around 3.5%, but Glaxo rose nearly 22%. It then underperformed a rising market in 2012, only to seriously outperform in 2013.
| Total return | GlaxoSmithKline | HSBC FTSE 100 |
|---|---|---|
| 2013 | 28.36% | 18.04% |
| 2012 | 0.70% | 10.36% |
| 2011 | 21.97% | -3.68% |
| 2010 | -2.44% | 13.04% |
| 2009 | 18.34% | 26.05% |
| 2008 | -21.79% | -28.76 |
Similarly, cumulative performance figures show that over three years, Glaxo has returned 44% against my tracker’s 27%. Over five years, it severely underperformed, returning 64% against 101% for the index. Win or lose, that is quite a wide tracking error.
| Cumulative return | GlaxoSmithKline | HSBC FTSE 100 |
|---|---|---|
| Six months | 4.5% | 1.5% |
| One year | 9% | 6% |
| Three years | 44% | 27% |
| Five years | 64% | 101% |
The only reason to invest in direct equities is that you think you’re clever enough to beat the market, by picking more winners than losers. So if you the Glaxo will outperform the market, then it makes sense to buy it. But if you’re idly buying it as a core holding and building block, it would make more sense to buy a tracker.
Index Thrasher
There are other reasons to invest in Glaxo rather than the entire index. You might think it is undervalued, for example. Although if anything, Glaxo is a little costly right now, at 14.8 times earnings against 13.25 times for the index. Or maybe you’re looking for higher income. My tracker currently yields 3.43%. Glaxo yields 4.7%. So rather than index tracker, at times it can be an index thrasher.
To answer my question: no, Glaxo isn’t a FTSE 100 tracker in disguise. It has added elements of risk and reward. So don’t buy it purely for its defensive solidity. It has a lot more to offer than that.
