18th September 2012
Five years ago you'd have been investing a decent proportion of your money in banks, which these days have slid off most people's buy lists.
Back in 2007 12% of constituents in the UK's leading share index – the FTSE 100 – were banks, with three of the top ten largest companies in the index made up of HSBC, Royal Bank of Scotland and Barclays.
But five years on from the credit crunch which ruined many banks around the globe, including Northern Rock in the UK, the landscape for investors has shifted, stresses a report in Investment Week today.
Taking a mindful approach to investing
Whether a passive or active investor, as the horizon has shifted significantly since the financial crisis took hold, make sure you know where your money is – and that you're happy with this.
While low-cost passive investing has become a catch phrase for many during this difficult time – to avoid active managers and high charges – looking under the bonnet of your fund is still important.
Passive funds track the performance of a particular market or index, rather than aiming to beat it. They are marketed as a low-cost, transparent option for investors seeking equity exposure. Alternatively, active funds enable managers to pick and choose the stocks.
So how has the passive route changed? Five years on from the collapse and subsequent nationalise of Northern Rock, the banking sector's dominance has diminished, for starters.
Today just one bank – HSBC -remains among the top ten largest in the country, while the total sector index weighting has fallen to 9.8%.
So what are passive investors going for these days?
While banks have suffered, defensive firms – unsurprisingly – have thrived, with the Oil & Gas sector increasing its index weighting from 15.18% in August 2007 to 17.75% today.
In fact, half of the FTSE 100's top ten would be classed as defensive. Vodafone and GlaxoSmithKline, British American Tobacco, Diageo and AstraZeneca are now all top ten members of the FTSE 100 by market cap.
But of course this is to be expected as in a buoyant economic climate, everything does well, but when the economic storm hits, those with the means to batten down the hatches do well.
So while the Passive vs. Active debate will always rage on, the underlying investments are in constant shift. Yet for every study that proclaims that index funds are better than actively managed funds, there is one that argues that the latter deliver greater value.
However, one point to bear in mind is that if you choose the passive route you may one day be invested heavily in mining stock, another in banks – depending on the temperature at the time.
The top ten companies in the FTSE100 index five years ago were, in descending order, Royal Dutch Shell; BP; HSBC; Vodafone: GlaxosmithKline; RBS; Anglo American; Rio Tinto; BHP Billiton and Barclays.
Today they are: Royal Dutch Shell; HSBC; Vodafone: BP: GlaxosmithKline; British American Tobacco; BG Group; Diageo; BHP Billiton and AstraZeneca.
Changing global and investment climate
Yet the make-up of the FTSE 100 isn't entirely based on the UK's fortunes. What's going on overseas is also affecting the passive investment route.
Many more FTSE 100 companies – including oil groups Shell, BP, together with multinationals such as British American Tobacco, and Glaxo SmithKline – derive the lion's share of their business overseas.
Qualification for entry into the FTSE 100 depends on stock market capitalisation – at present the lower limit for entry is around the £2 billion mark, rather than where business is derived from. The constituents of this index are reviewed every three months, and as many as 10 companies can be relegated from the list or promoted to it.
As a final word let's turn to Andrew Lyddon, one of the three authors of the Value Perspective Blog. He says: "… recognise that the outlook for the market is always uncertain, it's just that at times investors are more aware of that fact than at others.
"Today the stock market is acutely aware of the uncertainties and things that might go wrong, whereas back in, say, 2005-2006 everything seemed lovely for investors and people weren't really thinking that the world had the potential to change very quickly.
"If you approach things that way it leads you to focus much more on what you are paying for businesses and how reasonable that is. It should also make you want to ensure that businesses you invest in are financially robust in order to stand up to any future shocks."
So keep a keen eye on your portfolio for a mindful approach, whether you take the passive or active route.
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