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The FTSE 100 index, the UK’s premier stock market index, is about to celebrate its 40th birthday milestone on January 3, 2024. Over the years, it has provided investors with many happy returns, despite facing various challenges and market fluctuations. As we delve into the history and evolution of the FTSE 100, we can gain valuable insights into its transformation and the impact it has had on investors.
The Birth of the FTSE 100
The FTSE 100 was launched on January 3, 1984, as a replacement for the FT-30 index. It initially included 100 companies from various sectors, aiming to represent the performance of the UK stock market. Interestingly, a quarter of the original constituents still remain in the index today, demonstrating the longevity and stability of these blue-chip companies.
Evolution of the FTSE 100
Over the past four decades, the FTSE 100 has undergone significant changes, reflecting the shifting landscape of the global economy. The index has become less domestically focused and more international in nature. Out of the original 100 firms, only 26 founder members remain in the index. Some companies, such as Whitbread, have transformed their business models entirely, shifting from breweries to becoming hotel and restaurant groups.
Other companies have changed their names and corporate structures due to mergers, acquisitions, or strategic shifts. For example, British Petroleum rebranded as BP, and Reed International merged with Elsevier to form Reed Elsevier, later renamed RELX.
Acquisitions and Spin-offs
Several companies that were once part of the FTSE 100 have been acquired by current members or have been involved in spin-offs and demergers. Diageo, for instance, can trace its origins back to both Grand Metropolitan and Allied Domecq. Racal, on the other hand, demerged what is now Vodafone, a prominent player in the telecommunications industry.
Acquired and Gone Private
While some companies have been acquired and integrated into the operations of current FTSE 100 members, others have been acquired and subsequently gone private. Brands like Boots, Burton, Cable & Wireless, and House of Fraser have all experienced this trajectory.
The FTSE 100’s Performance
Despite the ups and downs, the FTSE 100 has delivered considerable returns for investors. Since its inception, the index has risen from 1,000 to approximately 7,660, providing a capital return of 660%. Moreover, investors have enjoyed an annual return of 5.2% as of the end of September 2023. These figures outperform the total increase and compound annual growth rate of the retail price index (RPI) over the same period.
It is worth noting that the FTSE 100 has shown resilience in the face of various challenges, including the dotcom boom and bubble, the financial crisis, and the recent COVID-19 pandemic. Despite periods of stagnation, the index has proven to be a reliable source of cash flow and dividends for investors.
Criticisms and Challenges
While the FTSE 100 has undoubtedly provided investors with favorable returns, critics argue that the index has failed to keep pace with the times. Some claim that it has become too reliant on a small number of established companies, hindering its ability to adapt to changing market dynamics.
A closer look at the current composition of the FTSE 100 reveals that just twelve firms make up half of its market capitalization. Eight of these companies, including Shell, Unilever, and BP, have been part of the index since its inception. While some argue that this lack of diversity may limit the index’s ability to reflect the broader market, others emphasize the stability and dependability of these long-standing members.
The FTSE 100’s Future
Despite the criticisms, the FTSE 100 continues to evolve, albeit at a slow pace. The final index reshuffle of 2023 is expected to bring further changes to the composition of the index. As new companies enter and others exit, the FTSE 100 will strive to maintain its relevance and competitiveness in the ever-changing global economy.
Conclusion
As the FTSE 100 index celebrates its 40th birthday, it is crucial to recognize the index’s significant contribution to the investment landscape. Over the years, it has weathered various storms and provided investors with consistent returns. While challenges and criticisms remain, the FTSE 100’s stability and long-standing members continue to attract investors seeking reliable sources of cash flow and dividends.
As we look ahead, the FTSE 100 will need to adapt to the evolving market dynamics and ensure a more diverse representation of the UK stock market. By embracing change and incorporating new companies into its fold, the index can continue to be a benchmark for investors and reflect the ever-changing landscape of the global economy.
With four decades of growth and transformation behind it, the FTSE 100 stands as a testament to the resilience and potential of the UK stock market. As we celebrate its 40th birthday, let us acknowledge the achievements of this iconic index and look forward to its continued success in the years to come.