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Think the FTSE 100 had a good year? You need to see this

Edward Sheldon, CFA
Chart showing an upwards trend

If you’re a FTSE 100 investor, you’re probably feeling pretty happy right now. For the year, the index generated a gain of approximately 12%. Add in dividends, and you’re looking at a total return of around 16% or so. That’s a solid return.

However, before you pop the champagne, it’s worth looking at the returns from other major global indexes this year in order to put the FTSE 100’s gain in perspective.

Underperformer

Let’s start with the US’s S&P 500 index. Its total return so far this year? Approximately 31%. Driven by the growth of companies such as Apple (up 85%), Microsoft (up 55%), and Google (up 29%), it has beaten the FTSE 100 by a wide margin.

Turning to Europe, the STOXX Europe 600 index, which provides exposure to a broad range of companies in developed European countries, has returned around 29%, also easily beating the Footsie.

Moving on to Asia, the MSCI China A International Index has delivered gains of around 35% this year, while Japan’s Nikkei 225 has returned approximately 21%.

And coming back to the UK, the FTSE 250 index, which contains the 250 largest stocks outside the FTSE 100, has produced a gain of around 25% plus dividends for the year.

Looking at these figures, it turns out that the FTSE 100’s performance in 2019 is actually quite disappointing. Relative to its peers, the Footsie has underperformed.

Low growth index

This leads me to a point that I’ve been banging on about for a while now – the problem with the FTSE 100 is that it’s a low growth index. Given its significant exposure to the oil & gas, banking, and tobacco sectors (all of which face significant challenges), and its lack of exposure to the fast-growing technology sector (it’s said that data is the new oil), the index’s returns going forward may be underwhelming.

Ultimately, if you want to see high returns from your portfolio, I think it’s essential that you diversify both internationally and into smaller UK companies.

Portfolio diversification

So, what’s the best way to do this?

Well, one easy way to get international exposure is to buy a tracker fund that has an international focus. For example, you could go for a S&P 500 tracker fund, a Euro STOXX 600 tracker, or an MSCI All-Country World Index tracker.

Alternatively, you could go for an actively managed fund that has an international focus. Examples include the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Both of these funds have outperformed the FTSE 100 by a wide margin in recent years.

For exposure to smaller UK companies that have higher growth prospects you could invest in a FTSE 250 tracker, or perhaps an actively managed small-cap fund such as the Liontrust Smaller Companies fund (up around 30% over the last year).

Or, you could even look at picking stocks yourself and put together a portfolio of higher-growth companies (the same goes for international stocks).

Ultimately, there are many different ways that you can diversify your portfolio. If you’re aiming for robust returns going forward, it’s something that you should definitely consider doing. 

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Edward Sheldon owns shares in Apple, Microsoft, and Alphabet and has positions in the Fundsmith Equity and Lindsell Train Global Equity funds. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020