Is the FTSE 100 safe? Hardly. Pay real attention now if you have a tracker sold to you as a cheap investment.
The FTSE 100 is a measure of the UK’s top 100 companies; however, research by Schroders showed that 62% of the sales of FTSE 100 companies came from outside the UK. Thankfully the returns of the companies actually originate in the other countries as opposed to relying on exports. BP is often touted as a British company. 17% of its sales come from Britain according to Credit Suisse First Boston. It is effectively an American company as 46% of sales are in the US and 18% in Europe. So much so, that if BP and Shell were to list today they would probably list in the US. Vodafone is another prime example with only 14% of sales coming from the UK.
Some companies have no sales exposure whatsoever such as BAT and also the mining companies, Anglo American and Rio Tinto. On this basis the FTSE 100 is effectively a global index and is subject to a lot of the risks that you don’t want when investing in the UK namely: global interest rates, oil price, weakness/strength of the dollar as well political and legal/currency risks. And here you are investing in what you thought was a domestic index (same currency and economy you are living in).
You have to go a little further down to see a broad spread of the domestic economy. The FTSE 250 companies have 60% of their sales accounted for from the UK as opposed to 38% for the FTSE 100. It is probably more relevant to invest in the FTSE all share to achieve a more domestic index than the FTSE 100. I would also point out to you that the FTSE 100 index is weighty at the top. BP, HSBC; Vodafone and Glaxo completely distort the index due to their size. Small movements in their price will tilt the index one way or the other. Having recognised this, the FTSE group recently created capped versions of the indices. Although the companies held will be the same there will be a cap of 5% on any one company in the index. Those of you who have tracking funds, tracking pensions and also UK based investments should reassess how much exposure you truly have to the UK and talk to your Independent Financial Adviser about this to review your risk and return going forward