There’s nothing like accounting jiggery-pokery – or even the sniff of it - to set journalists’ pulses racing, and Tesco’s £250m profit overstatement this week is a real shocker, coming as it does on the back of a year of seemingly fathomless problems. There is no other way to describe it: Tesco is in chaos – reflected in the 48 per cent plunge in its share price this year, including the 10 per cent knock from the latest revelation. Without M&S’s surprising generosity in allowing Alan Stewart to cut short his gardening leave, the grocer would have been without a finance director until December – an absurd situation for a FTSE 100 company, and one that the chairman, Sir Richard Broadbent, must take full responsibility for. It is mismanagement unlike anything I’ve ever seen from a blue chip.
That said, rarely have I witnessed such levels of incompetence among smaller companies, either, even though it’s often said that investing at the lower end of the spectrum is a far riskier proposition than backing tried-and-tested large caps. Amateur investors are often advised by those in the industry to avoid Aim shares - I suspect the many more cautious retail investors who instead hold shares in Tesco won’t be thanking them.
And Tesco isn’t the only blue chip to have found its shares under pressure this year. 44 companies in the FTSE 100 are in negative territory over the last twelve months; eleven of those have lost more than a fifth of their value over the period. The bribery scandal at GlaxoSmithKline and the continuing fallout from Macondo at BP are hardly glowing advertisements for the good governance and relative safety of the blue chip index. And as Mr Bearbull wrote last week, using GSK as an example, some mature blue chips are having to resort to financial engineering and debt to keep EPS rising and the dividends flowing. It’s a process that can’t continue indefinitely, as Tesco demonstrated this week.
All that said, the average price return on the FTSE 100 this is still better than Aim – 4.2 versus 3.6 per cent. And Aim has seen its share of hiccups, too, this year. 136 Aim shares have, like Tesco – the FTSE 100’s worst performer - halved in value this year; of those four have lost more than 90 per cent. And 436 fallers out of 790 on the market for the full year represents a higher proportion than on the blue chip index.
But what the FTSE 100 doesn’t offer is the potential for truly massive gains – only one company, Shire, has doubled in value, compared to 41 on Aim, of which the best performer Crawshaw saw a near-sevenfold return. It’s those kind of returns that make Aim investing an enticing prospects despite its risks – risks, incidentally, to which blue chips are most certainly not, as this week's events suggest, immune.
