The net result? The FTSE 100 has hardly risen in 20 years. It was at 7,100 on Friday, barely any higher than the 6,930 it hit at the end of 1999 (the Dax has tripled since then, and so has the S&P 500, and as for the Nasdaq, well, better not to ask). It is the worst performing major index in the world. Of course, on one level that does not matter very much. It is just an index, and there are plenty of different ones available if you don’t like it.
And yet, on a deeper level, indexes are important. Huge numbers of tracker funds simply buy the index, investing in whatever companies happen to be included. So do most pension funds, determining the fate of most people’s retirement. They are the benchmark against which companies and fund managers evaluate their performance, and against which chief executives measure whether they are underpaid or overpaid. Bonus schemes pay out millions for outperforming the FTSE 100, when in practice it is virtually impossible to underperform it.
And perhaps most seriously of all, it is so widely quoted as a snapshot of the state of the British economy that it creates a very distorted view of how the UK is doing. Anyone just glancing at the FTSE 100 would assume Britain was a basket case. That is not the whole story, but the index makes it look that way.
On all three measures, the FTSE 100 no longer serves any useful purpose. It would not be very hard to design a benchmark index that was far more representative of the wider economy. It would include some of the traditional conglomerates and banks, but also the top tier from the Aim, and a sprinkling of tech companies to provide some growth, as well as the best members of the FTSE 250 so that it reflected the domestic economy as well as a global one. And its composition would only change once a year.
Just like the Dax, it is time the FTSE 100 was retired, or at least reformed – and replaced with a new British benchmark index that reflected the actual economy.