A great deal of soul-searching followed the quarterly rejigging of the FTSE 100 ‘blue-chip’ index in the UK last month. It was the most radical quarterly revamp on record as nine stocks were welcomed into the elite and nine were edged out into the relative cold of the FTSE mid-250.
But the real fuss wasn’t simply about the numbers of new FTSE 100 members – it was about their nature. Most of those joining the index were ‘new world’ players from the technology, telecoms and media sectors. Four of them are loss-making and the pre-tax profits of all nine clubbed together over the last financial year only make £516 mn.
Compare that with the old world players dropping out of the index which together accounted for profits of over £3 bn. Unfortunately, they are not in the right sector for current tastes: breweries, building materials and utilities just don’t get investors excited at the moment.
For many observers, the dumping of established, solid companies in favor of young upstarts is just too much. A letter in the Financial Times questioned the sense of booting ‘old-time companies’ out of the top 100. And to replace ‘companies that still make profits’ with ‘companies that have yet to make any profit at all’ does not make sense.
So should investor relations officers be concerned by this turn of events? Well, erm, yes and no. Firstly, let’s get a few things straight. This particular index is determined by market capitalization. If you’re not in the top 100 (actually there’s a bit of leeway and it doesn’t kick in until you drop below 110) by market capitalization then of course you’re going to drop out of the index. End of story.
The companies leaving the top 100 have immediate concerns of their own – as do those dropping out of any index. What does this mean for investor interest, particularly from foreign investors? What are our chances of re-entering the index in the near future? What can we do to help investors through this period? Will it mean a further spiral downward for our stock?
Outside of those companies there should be a willingness to embrace change. Things move on, investor sentiment will change again in the future. Just as conglomerates were all the rage in the 1980s, so telecom stocks and their high-tech peers are in fashion today. That doesn’t necessarily mean it will last forever. If you need proof of that just look at where the conglomerates of the 1980s are today.
Stop the tut-tutting and think what your business is doing to embrace the future in your own sector – then go out to tell that story. The real tut-tutting should be going on at pension funds which have traditionally invested in FTSE 100 stocks thinking that it brought them relative safety and a good return from dividends. Now they should really be scratching their heads.
