Richard Northedge says the FTSE’s dismal performance since the millennium will deter a generation of investors
The familiar fallback for fund managers when shares falter is that investment is for the long term. But how long is long? December marks the tenth anniversary of a stockmarket peak that has never been seen again. Money invested in the 1990s will be showing a loss more than a decade later. How long must investors wait for equities to come right in the long term?
In fact, the FTSE 100, the index of leading UK shares, is lower this week than in 1997, shortly after New Labour came to office. The long bull market in which Black Monday in 1987 and Black Wednesday in 1992 turned out to be mere blips continued into those euphoric Blair years when things could only get better — then, on the last day of the decade as the Dome disastrously opened and the river of fire flickered along the Thames, shares stopped rising and never fully recovered.
The 1980s and 1990s had seen a revival in private investment as small shareholders accumulated portfolios of privatisation and de-mutualisation shares, but the new millennium has tested the maxim that equities are always ultimately the best investment. Not only are private punters questioning the point of owning shares, but pension funds have severely cut their equity exposures.
Since the FTSE 100 was created a quarter of a century ago, there had never previously been a period when it did not rise over five years, never mind ending lower after more than a decade. Earlier indices tell us that the 1974 crash briefly reduced prices to below their 1960s levels — an experience that caused many private investors to abandon direct stockmarket holdings entirely. But however far you run, it is hard to hide from equity investment: unit trusts, Isas, pension policies, endowment mortgages and child trust funds have all suffered from the long-term fall in share values too.
Yet there has been no major crash since that 1999 peak, just a steady decline interrupted by two strong rallies, one of which has lifted share prices by more than half this year — though still not enough to take them back to where they were a decade ago. For the active and clever investor there have been profits in the FTSE. The market halved between the end of 1999 and the start of the Iraq war in March 2003, then almost doubled to 200 points short of its all-time summit before the credit crunch began in June 2007; then it nearly halved again before this year’s rally started this March.
Anyone who cashed in a portfolio ten years ago, invested the proceeds in the FTSE in 2003, sold up again in 2007 and re-invested this March would have turned £100 into nearly £300 plus dividend income. For the really sophisticated, going short during the declining years would have yielded even greater profits. But people who passively held shares over the decade have seen their £100 dwindle to £77.
Wall Street prices peaked just after the millennium celebrations too, and fell by a third over the next three years. But the Dow Jones index stood at a new peak when the credit crunch struck. Even so, the roller- coaster ride has also left American investors showing losses since 1999 with the Dow down more than then 10 per cent over the decade. And as Matthew Lynn details on page 39, Japan’s Nikkei index, having halved in the 1990s, has halved again during this decade.
But despite the financial crisis, some asset prices have soared. Gold has quadrupled since Gordon Brown’s infamous sale in 1999; house prices — despite their own recent downturn — have still doubled over a decade.
Yet the shareholders who have seen their capital contract have not been compensated by income payments either. Before the millennium, companies cut their dividends only when necessary to stave off collapse, but the past decade has seen finance directors slash shareholders’ payments at the first sign of potential problems. Some companies that froze or axed their dividends in 2001 when recession looked a possibility had only just restored them in time to cut again when recession became reality last year.
And don’t forget inflation. Each £100 of shares held at the end of 1999 would in fact need to be worth £130 to have kept pace with retail prices, not the £77 they are currently worth. Some FTSE stocks have well out- performed inflation, of course: Reckitt Benckiser’s have risen 350 per cent and British American Tobacco soared more than fourfold. Unilever, Whitbread, Marks & Spencer and Tesco are all well into positive territory.
Losers far outnumber winners, however. BP is marginally higher on the decade but Shell is fractionally down. And while Astra Zeneca has been flat, its pharmaceutical rival GlaxoSmithKlein has lost a third of its value. Of the banks, while HSBC shares have risen by almost 10 per cent since the end of 1999, Barclays is down by a quarter and Lloyds and Royal Bank of Scotland have lost almost all their investors’ money.
And the list of losers includes most of the shares private investors acquired from privatisations and building society conversions in the pre-millennium decades. TSB and Halifax sank with Lloyds while Bradford & Bingley shares are as worthless as Northern Rock’s. Railtrack hit the buffers and United Utilities is underwater at little more than two thirds of its 1999 value. BAE is down 10 per cent, British Airways 40 per cent and BT — Britain’s third biggest company ten years ago — has lost four fifths of its value.
Actually, anyone holding the FTSE ten years ago has lost far more than the fall in the index suggests because the worst performers were expelled for shrinking too far. Dixons and Granada — now DSG and ITV — have dropped out of the index while GEC turned into Marconi and virtually evaporated. Exciting new names that floated into the FTSE on the dotcom tide — remember Colt Telecom, Arm Holdings, Baltimore, Kingston Communications, Thus and Dimension Data — shrivelled when the bubble burst or, like Energis, went bust. Anyone who has the misfortune still to hold the 100 companies that comprised the FTSE then has a very miserable portfolio now.
Fund managers used to regard five years as long term — long enough for their mistakes to come right, and longer than the average that investment managers stay in their jobs. Now even a decade is not long enough. The Noughties have been a profitless blank even for many seasoned investors, but the loss is unlikely to end soon.
The FTSE would have to rise by 30 per cent to return to its December 1999 level, and despite this year’s rally, not even the bulls expect that. During the early years of the next decade, shares will still be below the prices in the last decade but one.
Even if this is a once-in-a-generation phenomenon, it will colour the view of equities for the generation whose pension pots have dwindled and nest eggs diminished. Investors have lost a decade and stockmarkets may have lost their future investors.