If one of your new year’s resolutions in 2015 was to invest in a FTSE 100 tracker, you may be ruing the day you did so.
With the end of the year nearly upon us, the global resources rout has dragged the index down by more than 7 per cent since January (though an average dividend yield of 4 per cent provides some consolation).
The big question is whether the oil companies and mining stocks that have dug passive investors into a deep hole can climb out of it next year — but few are willing to predict a happy ending in the short term.
The table of the FTSE 100’s biggest losers is dominated by the miners. Topped by Anglo American — down 75 per cent this year as the collapse in the iron ore price caused its dividend payments to cave in — Glencore, BHP Billiton and Antofagasta make up four of the worst five performing stocks, with Rio Tinto languishing at number seven.
Weakening Chinese demand is to blame. It is estimated that there are 100m tons of surplus iron ore in the country as the pace of industrialisation abates — and while low commodity prices persist, analysts fear investors in the sector face further pain from rights issues and restructuring.
Nevertheless, Richard Hunter at Hargreaves Lansdown notes that on measures such as price-to-book and price to cyclically-adjusted earnings, valuations for both the oil companies and the miners are at multi-decade lows. “We may look back in five years and view this as a great buying opportunity,” he says, while cautioning that prices could still have much further to fall.
An interesting point to come out of FT Money’s end-of-year investment review was how fund managers only had to make one call at the start of 2015 to guarantee outperformance — avoiding commodities and miners.
With so many fund managers correctly making this call, to be in the top quartile of UK equity fund managers they would have needed to beat the index by almost 6 percentage points a year on a three-year rolling basis — quite a staggering number.
The other trend to note is the concentration of performance in highly valued growth stocks, and the relative underperformance of everything else (including value stocks, which have underperformed globally for the past five years).
Just look at the table of the FTSE 100 winners, and again, one sector dominates the outperformance — the UK housebuilders. Underpinned by generous government subsidies for new-build homes in the form of Help to Buy and rock-bottom interest rates, Taylor Wimpey is the standout stock, with growth of 46 per cent year-to-date. Barratt and Persimmon also make the top ten.
The chancellor’s continued largesse at the Autumn Statement, with a special Help to Buyproduct for London and promises of thousands of new homes, provided a year-end fillip. But the sting in the tail could be the tougher tax treatment of buy-to-let properties, which face a 3 percentage point surcharge in stamp duty from next April. With overseas investors in new-build homes already facing currency headwinds, higher transaction costs could put them off altogether. And domestically, the Bank of England’s worries about buy-to-let lending could be another party pooper for the builders in 2016.
The narrowing concentration of outperformance is also evident across the pond — the so-called “Fang Nosh” stocks of the S&P 500 (Facebook, Amazon, Netflix, Google plus Nike, O’Reilly Automotive, Starbucks and Home Depot) have been propping up the whole index over there. “Market leadership is becoming progressively narrower, and without these tech and consumer stocks, the index’s performance is far less exciting,” says Gareth Lewis of Tilney Bestinvest.
It is worrying to think how this theme of a “few good winners” could deepen in 2016, and it will be fascinating to watch how the big fund managers diverge in strategy as the year progresses.
But not all passive investors have ended the year on a bum note. If you had decided to track the more domestically focused FTSE 250 at the start of this year, you’d be nearly 7 per cent up — pretty much the opposite of the FTSE 100.
Leaving aside the biggest FTSE 250 winner (Betfair Group, up 143 per cent now competition regulators have approved its merger with rival Paddy Power), the dominant group here are consumer stocks. Rene Ilves
