Derek Pain: The Thirty may be elderly but it shows the best of British
No Pain, No Gain
Saturday 09 July 2011
After years of obscurity, the FT30 share index is being given a little more prominence. Such a move is to be welcomed. After all, what was once the only measurement of the stock market's performance reflects, I believe, more accurately the British display than its successor, the FTSE 100 share index, more popularly known as Footsie.
The FT30 was born in 1935, and is the world's oldest surviving share index. It reigned supreme until 1984, when Footsie, with 100 shares, appeared. It did not surrender its authority immediately. Indeed quite a few newspapers, including The Independent, gave the old and the new equal billing. But gradually the FT30 slipped into near oblivion, although its movements continued to be recorded. Still, only the eagle-eyed could spot its daily display.
The Thirty, as its name implies, is composed of shares of 30 leading companies. Unlike Footsie, its constituents are home-grown. And in its early days it ignored exploration – too risky – and possibly naughty financial shares. Explorers, in the shape of BP, arrived in 1977, and NatWest (now Royal Bank of Scotland) appeared in 1984 as financials were belatedly given membership.
Its Britishness means the FT30 offers a rather more distinct mirror of the UK economy than Footsie, which is made up of top companies quoted in London, irrespective of their domicile. Besides the number of shares embraced, there are other differences. The FT30 gives equal weighting to its constituents (irrespective of their stock market value), whereas Footsie is weighted on capitalisations.
The method of selecting constituents is also different. Footsie membership can change every three months, with some constituents booted out for poor performances and their places taken by shares that have reacted more strongly. The FT30 is lumbered with its members. Changes occur only when a company has to be replaced because of a takeover or delisting. Even so, recruits are often from the same line of business as the departed.
There are only two survivors from the 1935 collection: Tate & Lyle and GKN (formerly known as Guest, Keen & Nettlefolds). Such icons of past years such as Austin Motor and Bass have disappeared. In 1935, Harrods and Woolworth's, as substantial quoted companies, were included. So, of course, was Imperial Chemical Industries, once the bellwether of British industry; it survived until a few years ago, when it fell to a Dutch group. One initial member, the Bolsover Colliery, went out with coal nationalisation after the Second World War.
The make-up of the FT30 has restrained growth and allowed Footsie to give a more reflective view of the stock market. The Thirty's criteria for membership means that fast-growing companies can be excluded, whereas Footsie's open-door policy allows it to quickly recruit shares on the move, such as exploration and technology stocks. Since the FT30's creation, at 100 points, I think its lowest level was 45 points at the outbreak of hostilities in 1939. It is estimated that to have kept pace with inflation it should now be around 3,700. Last week it closed at 2,216.
It could be argued that the FT30 was never primarily an investment tool but more an indication of the country's business profile. The FT30's staid reputation – and obscurity – is in sharp contrast to Footsie. Yet its successor's more rip-roaring approach has its drawbacks. Sir Richard Lambert, a former Financial Times editor, believes Footsie is providing "a cloak of respectability and lots of passive investors for companies that challenge the canons of corporate governance". He cites as examples a number of overseas mining enterprises.
One company courting controversy is the miner Eurasian Natural Resources, where independent directors, including the highly regarded Sir Richard Sykes, were unceremoniously ousted from the board last month. Normally Footsie requires 25 per cent of a company's shares to be in public hands. But in the case of Eurasian Natural this rule was waived, and only some 18 per cent of its capital went to outside investors. It seems that tracker funds, obliged to invest in the miner because of its Footsie membership, are less than impressed by the boardroom upheaval and the post-flotation share performance.
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