Have you ever wondered why there is no Warren Buffett-equivalent in the UK?
Is it due to a lack of talented investment professionals in the UK? I think not. Over the years, we had, among others, Jim Mellon, Neil Woodford, and Anthony Bolton. London houses a number of billionaire hedge fund managers. But none crossed that magical $50 billion threshold in net worth. Could it be Buffett’s ‘buy and hold’ strategy is wholly unsuitable across the Atlantic? I doubt that, too. And could it be that there is no good British companies that can compound and grow over the long term? Perhaps. Buffett himself made a little venture in Tesco Plc (TSCO) a while back. The result? A good old ‘thumb sucking mistake’ that cost him $444 million. He stayed away from the UK since.
Should you avoid FT 30 UK large-caps?
When the real Buffett couldn’t even make a profit from UK plc, no wonder there is no ‘Sir Buffett’ here. The key Buffett strategy is to buy quality big companies, in part or whole, that can grow even bigger. Coca-cola (KO) was already huge when Buffett started investing there; so was Apple (APPL). But if we look at the mega/large-cap index here, the result is somewhat disappointing.
To see this trend, I drag out the FT 30 Index. For readers unfamiliar with this index, the FT 30 Index is based on 30 British companies from a variety of UK industries.
What is the FT30 Index?
It is a very established index, going back to 1935, although the pre-1980 data is difficult to source. Unlike the other 30-member stock indices like Dow Jones Industrials (DJIA) or DAX, the FT 30 index is no longer quoted in the press.
The preferred index is the ‘Footsie’, or the FTSE 100, as it encapsulates a larger portion of the blue chips. Still, FT 30’s performance shed some very interesting angles on the UK stock market.
UK Big-cap Stock FT 30 Index Stagnant for Years
The first impression of the index? Not very good. The latest (as of Sept 28) saw the index close at 2,130. At this level, the FT 30 index is no higher than it was back in 1992. Think about this, the index has not made real – or even nominal – progress in 28 years! It makes me think.
Is this is the best the FT 30 index can do amidst:
- a collapse of borrowing cost from 17% to 0%,
- a credit bubble, and
- a great housing market, I wonder what a deep recession will do to the index.
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Optimists may disagree. They will point to the three bull markets (1980-2000, 2003-2007, 2009-2018) that could have yielded massive profits for astute investors. The key, however, lies in market timing. You need to sell at the right time – three times to be exact – to avoid three devastating bear markets. Not only that, you needed to buy at the right time too. Few does market timing perfectly every time. Not even Buffett.
The whole point of buy-and-hold is to avoid market timing. When the ‘holding part’ does not result in profits, what is the purpose in buying?
FT 30 lags behind Dow and Dax
To further see the difference in performance between the FT 30, DJ Industrials and German Dax, look at the figures below. This comparison is interesting because all three indices are made up of 30 stocks, has a long history, and exist in well-established exchange systems.
2/Jan/1980 28/Sep/2020 Gain (local currency)
FT 30 407.0 2,130.4 5.2x
Dow 30 824.6 27,584.1 33.5x
Dax 30 493.5 12,870.9 26.1x
All three started in 1980 at three-digit numbers. Four decades later, only FT 30 is still trading below 3,000. Dax last saw that level 17 years ago; Dow has never revisited it since early nineties. In terms of multiple, Dax soared an impressive 26x from that 1980 starting point; while DJIA rose a stunning 33.5x. In contrast, FT 30 managed only 5x.
In graphics form, I rebased the performance of all three indices (1980-2020) below. With this chart, you’ll understand immediately why there is no Buffett in the UK. Big British large-cap stocks are simply lagging significantly behind its international peers. UK has no $2 trillion-cap stocks; many promising large companies were bought out, thus depriving the index of further gains; sagging financials weighing on the index.
Specifically, among some of FT 30 member constituents, BT Group (BT.A) is down 80% from its mid-decade peak. Scores of stocks flirting with their 2008 crisis lows, such as Vodafone (VOD), Lloyds (LLOY), Barclays (BARC), Natwest Group (NWG), and Marks & Spencer (MKS).
The fall of Marks & Spencer is particularly telling. In Sep 2019, the century-old retailer was booted out of the FTSE 100 as its share price plummeted. Currently, MKS is worth only £1.95bn in market capitalisation, while its delivery partner Ocado (OCDO) is ten times larger – £21bn.
Lessons for beating the FT 30 Index?
Look at mid-caps.
Large-cap British stocks are simply not up to the job in generating shareholder returns over the long term. Too many venerable British stocks are buckling under intense competition. Investors need to look at younger companies in the FTSE 250 mid-caps and larger small caps for growth. The UK market may be too small for Buffett, but for ordinary investors there are still choices to be had.
Investors also need to be aware that financial stocks (banks, insurance, asset management) are underperforming now due to negative interest rates and rapid changes in the industry.
Invest in ex-UK markets.
Investors also need to look at markets outside the UK, such as US or Germany; or emerging markets. Buying investment trusts or funds may be needed to diversify away from the UK market. Investors in Special China (FCSS) or Scottish Mortgage (SMT) would have done far better than Centrica (CNA) or Sainsbury (SBRY).
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