Back Great Britain with a bet on the FTSE 250
This weekend, investors will once again wonder if the FTSE 250 Index is the gateway from which companies rise to true greatness or the home of losers.
This follows the quarterly shakeup in which some companies leave the FTSE 250 to join the elite FTSE 100 club, from which others will be demoted.
This week the FTSE 100 welcomed, among others, Dechra, the veterinary pharmaceuticals business, Diploma, a supplier of gaskets and other essential components, and Marks & Spencer, the new fashion leader.
Meanwhile, Abrdn, the asset manager, Hiscox, the insurer, and Persimmon, the homebuilder, all fell to the more domestically focused FTSE 250.
This reconfiguration coincided with a pessimistic assessment of the entire UK market, which is in a “very sorry state with no natural investors”.
Or so argues Richard Buxton, the recently retired star stock picker at fund manager Jupiter.
The causes of this situation include Brexit, the disdain of UK pension funds for British stocks and the lure of more generous valuations that Wall Street offers to promising companies.
Buxton is right. But it should be balanced against the opportunities offered by the FTSE 250, the components of which are worth together around £323bn. This may be a fraction of the capitalization of Apple or Nvidia, the American tech titans that have driven the 34 percent rise in the Nasdaq index this year. The FTSE 250 is down 4 per cent.
But a diversified portfolio requires companies of different statures. Furthermore, larger companies are not guaranteed to outperform smaller ones, notes Jean Roche, manager of the Schroder UK Mid-Cap investment fund.
She says: ‘[Distributor] Diploma has outperformed even the mighty Apple in the past 12 months, which means that if history is any guide for the future, the UK midcap space is worth considering for long-term investors.
RBC Brewin Dolphin’s John Moore notes that the FTSE 250 contains “mid-sized, financially sound, profitable UK companies”.
These include Centrica, which owns British Gas, home goods retailer Dunelm and several large investment funds, including Bankers. The most attractive member of the index is Aston Martin Lagonda, whose shares are rated a “buy” by brokerage Jefferies.
Ed Monk of Fidelity International says that followers of the FTSE 250 see it as the “Goldilocks” part of the market.
“The companies that participate in it are not so big that all their significant growth is left behind, but they are also not so small that they are at significant risk of failure, as genuinely small companies can be,” he says.
Dan Boardman-Weston of BRI Wealth Management acknowledges that members of the FTSE 250 have been hit harder by the economic downturn than their FTSE 100 counterparts. The FTSE 250 is down 23 per cent from its peak in September 2021.
But he adds: “This crisis will not last forever.” Over the last 20 years, the FTSE 250 has generated a return of almost 470 percent for investors. That’s a fraction behind the 490 percent of the S&P 500, but well ahead of the 275 percent of the FTSE 100.
The index’s price-earnings (p/e) ratio – an indicator of value – is 12 times, against the average of around 21, and could benefit from just one more Bank of England base rate increase. According to broker Martin Currie, the FTSE 250 tends to outperform the broader market in the period after a spike in rates.
This year I have been buying British products because I feel that perceptions will change. I already own Smithson and SDCL Energy Efficiency, two investment trusts that are members of the FTSE 250.
But I’ve been noticing the double-digit discounts in trusts like JP Morgan Mid Cap and Schroder UK Mid Cap Fund that put money into FTSE 250 names. Their share prices are below the net asset value of their holdings.
They have stakes in companies like Games Workshop, which makes fantastic miniature war games. Its shares are up 21 percent this year.
Roche states: ‘Games Workshop is one of our long-standing successful investments in Schroder UK Mid-Cap. His Warhammer series of books and stories give him a very strong business franchise.”
There are no sure ways to win the investment game, if only there were.
But I’m betting that bets on a number of mutual funds that back the FTSE 250 will turn out to be winners.