FTSE 100 over 7,000 – that’s a 1% rise since 1999

•    The FTSE 100 has broken through 7,000, only 1% higher than in December 1999 
•    But UK fund investors have made 166% over that time
•    Dividends, smaller companies and active management explain the difference
•    Best performing UK funds since 2000
•    Why the FTSE 100 isn’t a good measure of long term investor returns
•    Funds to access dividends, mid and small caps

Laith Khalaf, financial analyst at AJ Bell, comments:

“The FTSE 100 has broken through the 7,000 mark, but that’s just a hair’s breadth above the 6,930 peak it hit in December 1999. This suggests the UK stock market has returned next to nothing over the last 21 years, but actually, UK equity investors have more than doubled their money in this time.

“The headline FTSE 100 index doesn’t include dividends, smaller companies, or any tailwind from active management, so it massively underplays the long term returns enjoyed by investors. The FTSE 100 works as a good day to day indicator of trading performance of the UK’s big blue chips companies, but over the longer term, it totally misses the mark for a stock market as generous with dividends as the UK.

“While it’s the UK’s headline index, the FTSE 100 doesn’t act as the benchmark for most UK funds which will sit in investors’ portfolios. Instead these funds measure up to the FTSE All Share, which is around 80% constituted by the FTSE 100, but with the remainder made up of small and midcaps. This index has risen 24% since the turn of the century, still not a great return, but when you add in the dividends paid by these companies, the picture improves enormously.

“With dividends reinvested, the FTSE All Share has returned 155%, turning a £10,000 investment into £25,540. This really demonstrates the compounding power of reinvesting dividends for future growth. Active managers have added a bit of a tailwind too, even after charges, with the average UK fund registering a 166% total return over this period, compared to 155% from the FTSE All Share. Much of this additional return can likely be attributed to a higher weighting to midcaps within the portfolios of many UK active managers, where returns have been exceptional. This is reflected in the strong performance of some individual funds operating in the midcap space.”

Index returns since 31/12/1999

Source: FE total return 31/12/1999 to 16/04/2021

Best performing UK stock market funds since 31/12/1999

Source: FE total return 31/12/1999 to 16/04/2021

Funds to access UK dividends, small and midcaps

Dividends: Man GLG UK Income
Fund manager Henry Dixon invests across the market cap spectrum looking for unfashionable companies which he thinks the market has undervalued, and which are paying a sustainable dividend to investors. One of the attractions of the UK market, and indeed the cyclical sectors within it, is that companies often come with a healthy dividend stream attached, which can be drawn as income, or rolled up for further compounding. Clearly last year saw dividends chopped as the pandemic hit company profits, but as those recover, dividends should too. The current yield on this fund is 4.3%, as ever - variable, and not guaranteed.

Midcaps: Franklin UK Midcap
Fund manager Richard Bullas runs a concentrated portfolio of 30 to 40 medium-sized companies he’s identified as having quality finances, but which are trading at attractive valuations, with a particular emphasis on cash flows. Mid caps have been the best performing area of the market over the last year, and while the FTSE 250 index has just hit a record high, medium-sized companies should be well-placed to benefit from a domestic and international economic expansion.

UK Smaller Companies: Standard Life UK Smaller Companies trust
Fund manager Harry Nimmo has been running this trust since 1993. He wants to invest in tomorrow’s largest companies today, and so runs a concentrated portfolio of smaller companies with good growth prospects and robust finances, so they can weather the occasional storm.