This week the FTSE-100 touched 7,000 points, a smidge over its 1999 peak of 6,930. On the surface, this appears to be terrible performance, leaving you wondering if the FTSE-100 is actually a good investment. But dive under the surface to include dividends and you would’ve more than doubled your money. UK markets have a lot to offer.
FTSE-100 returns rely on dividends
It’s easy to look at the optics of the good ol’ home market’s performance and ponder whether returning flat over 20 whole years makes the FTSE-100 a good investment. It’s stocked with big, blue-chip, global mega-stars. Surely that’s got to do something for my account balance?! Well, it would if you’d invested then. And don’t call me Shirley.
What’s missing in the headline rate is the dividends the footsie dolls out. We’re actually known for being a very strong dividend paying market. 2020 involved a lot of pandemic related cuts, but 2019 – perhaps a normal year – paints a more realistic picture. According to research by Janus Henderson, UK companies paid $106bn in dividends in 2019; the US $535bn. Although around five times higher, it serves to remember that the latter’s market is ten times its size. Globally, the UK represents around 7.3% of all dividends paid.
It’s why, when mulling over if the FTSE-100 is a good investment, you need to think about including dividends. If you’d reinvested them over the 20 years since the previous peak, then your returns would stand at 116% today. In other words (numbers), £10,000 would have turned into £21,600.
Laith Khalaf, financial analyst at the UK’s second largest platform AJ Bell, describes the impact of dividends:
“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 chip companies, but over the longer term, it totally misses the mark for a stock market as generous with dividends as the UK.”
Smaller companies still pay their way
FTSE-100 funds are not entirely representative of UK investor appetites however. It turns out we like some of the challengers to the big boys, and opt to put small and midsized businesses in our portfolios too. So what do these do for our returns, according to AJ Bell?
“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 mid-caps.
“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.”
The right fund managers earn their keep
So, the UK seems a worthwhile addition to our portfolios and dividends important, but are actively managed funds the way to invest here? As exchange traded funds (ETFs) enter the mainstream Investment Association (IA) sectors this week, the debate still rages over whether fund managers are worth the pennies. It turn out some very much are, as Khalaf adds:
“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 (midsized companies) within the portfolios of many UK active managers, where returns have been exceptional.”
Khalaf points out the top performing active funds of the past 20 years. Although past performance may never be achieved again, strong long term performance at least points us in the right direction of reputable fund managers. Faith Archer discusses the other stuff to look at when choosing a fund here.