Jeremy Warner's Outlook: The FTSE 100 is neither fish nor fowl. Now here's an index that reflects how people invest

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The Independent Online

Tricky things, stock market indices, as the business reporting team at The Independent has discovered in attempting to devise an index which more accurately reflects the performance and successes of the UK economy than the measures used by FTSE, a joint venture between the Financial Times and the London Stock Exchange.

Over the years, the FTSE 100, the most commonly used yardstick for the ups and downs of the UK stock market, has become an increasingly irrelevant guide not just to the UK economy, but even to the true stock market performance of UK companies.

Dominated by a curiously eclectic mix of multinational oil, mining, financial and pharmaceutical companies, it is neither fish nor fowl, neither truly representative of the global economy nor properly grounded in the UK economy either.

Some of the latest additions to the FTSE 100 include an online poker gaming company registered in Gibraltar but with the vast majority of its earnings derived from the United States, and a Kazakhstan copper mining concern. How weird is that? Indeed the only thing that gives meaning to the FTSE 100 at all these days is that all its constituents chose to have their primary listing in London. In other respects the index seems more and more a measure of only the random and the oddball.

The FTSE 100's other main drawback, it has long seemed to me, is that it is a weighted index, in that it is calculated according to the market capitalisations of its constituents.

Companies with the highest stock market values gain a disproportionately large weighting within the index, making it highly sensitive to whatever the fashion sectors of the moment happen to be. While this accurately reflects capital allocation, it is not the way most ordinary mortals would chose to invest.

Our approach in constructing the Indy 100 is to adopt in broad outline the model used by the Dow Jones Industrial Average in the US. Each of the Dow's 30 constituents are assigned an equal weighting in the index, regardless of size. They are also chosen on a discretionary basis to be representative of the US economy.

In performing the same exercise for the UK, we found that 30 was not enough, or rather that it was too small meaningfully to reflect the make-up of the UK economy. For instance, manufacturing still accounts for some 15 per cent of the UK economy, but it proved virtually impossible to find any large, quoted examples of pure UK manufacturing. Ownership of UK manufacturing, it seems lies mainly overseas, or in the hands of international conglomerates and private equity.

Yet with an index of 100 constituents, we can reasonably reflect the continued importance of manufacturing to the UK with a larger quantity of small British industrial success stories.

We encountered the same problem with the City, now of vital importance to Britain's economic success, but in investment banking at least, largely controlled by overseas concerns such as Goldman Sachs and Deutsche Bank. To reflect the City we have therefore had to go for a larger number of smaller niche players, and by opting for Man Group to reflect the growing importance of hedge funds, we had to twist the rules a bit. Much of Man Group is necessarily run from overseas.

No apologies for including BP and Tesco in our index, even though BP derives the great bulk of its earnings from overseas and Tesco a growing proportion of them. To have excluded these two quintessentially British success stories would have have looked eccentric. Nor will we tolerate any criticism of Bloomsbury, a relative tiddler, but as publisher of Harry Potter, an outstanding example of Britain's continued success in the creative industries.

The upshot? Since 1997, our index has outperformed the FTSE 100 threefold and in the meantime, there's hardly been a bear market at all. Of course, we've had the benefit of hindsight, and though we've tried to be fair in our stock selection, deliberately going for some duffers alongside the star turns, there's bound to be a subconscious bias towards success.

Even so, the sheer scale of the outperformance speaks for itself. This is a much better way of investing than tracking the FTSE 100 or All Share. Indy 100 constituents will be reviewed on a yearly basis and only removed if they go bust, are taken over or are judged to have become irrelevant under our criteria. You know it makes sense.

Pensions debate reaches denouement

The mound of proposals for pensions reform has grown into a veritable mountain as this week's deadline for submissions to the Government's pensions White Paper approaches. Every day brings a lorry load more.

One of the more interesting comes from Frank Field, the MP asked by the Prime Minister to "think the unthinkable" on pensions reform when the present Labour government first came to power more than eight years ago. Mr Field thought about it a little, and came up with a commendably simple and in some respects compelling response.

Needless to say, it never got beyond the drawing board, with the Government choosing instead to opt for a chaotic combination of means tested pension credits and stakeholder pensions. By common consent, it hasn't worked. Fast back to Mr Field's original idea, which he has since been refining under the umbrella of the Pensions Reform Group. This envisages a non state, universal pension which would run alongside the basic state pension to deliver an income to all in retirement worth between 25 and 30 per cent of average earnings.

To fund this pension, employees and employers would be compelled to pay into a central fund governed, a bit like the Bank of England's Monetary Policy Committee, by an independent panel of wise men.

Mr Field believes that his proposals have key advantages over the recommendations put forward by Adair Turner's Pensions Commission, which indeed he dismisses in a speech tonight as a "squandered opportunity for pensions reform". The key difference between the two is that Mr Field envisages a collective, or pooled, approach to a funded pension, with the monies collected like a tax on a compulsory basis, whereas Lord Turner's approach is based on individual savings accounts, with the employee given the right to opt out if financial circumstances don't suit.

Mr Field points out that the Turner approach won't eradicate means tested benefit, as many savers will in practice exercise the opt out. Furthermore, depending on how and where they are invested, some individual accounts are bound to perform better than others, leaving the Government open to the charge of mis-selling.

Yet his own approach seems to me to be even more dangerous. Problem number one is the strong likelihood that it would end up costing a great deal more to achieve the desired result, and would in any case lumber the taxpayer with the liability if the investment strategy failed to deliver as planned.

Some people will make mistakes under the Turner approach in the way they invest their money, but this is surely preferable to the possibility of one gigantic, collective mistake, the danger of which will make the trustees of Mr Field's Universal Protected Pension extraordinarily risk averse in their investment strategies.

However independent of Government they are, in practice, highly likely to become just a branch of the Debt Management Office, with all the money going into gilts. To the extent that they do invest in equities, there is also a risk of what one City veteran in a misguided criticism of the Turner proposals has called "nationalisation by the back door". This could apply to the pooled national investment vehicle envisaged by Mr Field, which might build up substantial positions in certain companies, but it couldn't happen with individual savings accounts where there are individual rights of ownership.

The pensions debate that Mr Field began is all these years later reaching its final denouement, But though Mr Field can claim credit for some of its central facets, I fear that the Government will still think of his key proposal as essentially unthinkable.

j.warner@independent.co.uk

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