In 2012, Rita McGrath, a global business analyst and author of Discovery Driven Growth, conducted research into the make up of the FTSE 100 which showed that only a quarter of the constituents that made up the UK benchmark at its inception in 1984 were still in place, and that proportion has dwindled further in the intervening period, as the average annual turnover rate for the index, including reclassifications, came in at 14.2 per cent. With Melrose (MRO) just announcing that it was moving to compulsorily acquire any outstanding shares in its successful bid for GKN (GKN), the number of original companies on the index will represent just over a quarter of current constituents once the latter engineer’s shares are delisted on 21 May.
We got another reminder of what generates this ‘churn’ last week, when the board of Shire (SHP) confirmed that it would be recommending (somewhat less than effusively) a revised £46bn offer for the FTSE 100 pharma heavyweight by Japan’s Takeda. Other potential changes are afoot; it’s conceivable that Unilever (ULVR) could drop out of the top-tier index once it moves its headquarters to Rotterdam, although that’s largely at the discretion of FTSE Russell, the organisation that administers the share index. If the household goods giant was bundled out of the index, it would force tracker and exchange traded funds (ETFs), indeed any institution mandated to hold shares in every FTSE 100 constituent, to dump the stock. It’s little wonder that shareholders aren’t universally sold on the move to the Netherlands, even with the sweeteners on offer from Dutch prime minister Mark Rutte.
So, the FTSE 100, if not in a perpetual state of flux, is certainly more dynamic than many of us might imagine. And that dynamism is intertwined with the rate of technological change. We see it playing out in, say, the way retailers and advertisers are scrambling to rejig their business models in the face of e-commerce, or the way that the biotechnology market has evolved in line with our understanding of genetic diseases. Of course, the make-up of the index will always be predicated on mergers, promotions, demotions, and new mega-listings, together with the occasional insolvency. But you could say that the most profound change since it was created has been its transformation from a UK-focused index to one that primarily reflects the fortunes of the global economy, although that means that the performance of the FTSE 100 isn’t particularly illuminating where the wider UK economy is concerned.
FTSE 100 companies account for about 80 per cent of the entire market capitalisation of the London Stock Exchange. But even though it’s a capitalisation weighted index, for investors it is useful to understand the sector weightings in the context of asset allocation. Fund managers, especially those with flexible mandates, are always trying to determine which trends are likely to have the greatest impact on the make-up of the major indices. For listed companies, a failure to do likewise could represent an existential threat. Ruth McGrath makes the point that, “beyond being consumed by larger or more aggressive companies”, listed blue-chips tend to come unstock when “they fail to anticipate or react to new technology, new customer demands or competitors with new business models, products and services”.
As investors, we know this applies to us, too. So, what trends or market dynamics could conceivably have a major influence on the composition of the FTSE 100 a decade from now? Well, on the product front, it’s difficult to go past the overarching impact of digitalisation; it will apply whether you’re driving your car (or not driving it, as the case may be), booking a medical appointment, or even buying shares – it’s virtually inescapable.
