Leadership is changing in stockmarket indices – pharma and biotech is now the UK’s biggest by capitalisation. Benchmarks tend to lag, with demotion of stocks and sectors typically after they underperform. They may not even at any time be particularly representative of any economy, as fast growing businesses can access private finance and delay listing. The drop in weightings of oil and gas, along with banks and financial services, highlights how much economies have changed. This pattern has been seen in the US Dow Industrial, FTSE All-Share and MSCI Europe. Mid-cap indices, such as the FTSE 250 have done a much better job of capturing the leaders of the future. Indices typically see sector rotation in the rear view mirror.
Pharma and biotech now represent more than 10% of the FTSE All-Share, with banks a little over 6%. Surprisingly the bank weighting still exceeds technology and e-commerce combined. Passive investing has struggled to keep up with the areas of strong growth this year, such as IT services.
The process by which indices are weighted towards the stars of yesteryear, rather than tomorrow’s winners, explains a lot about performance in UK active all-companies equity funds. The FTSE Mid-Cap Index has dramatically outperformed the FTSE 100 for two decades. This has accelerated in 2020, although the pattern in March showed that mid-cap can be more volatile in the very short term.
Fans of passive investing claim it is simply buying the market, cheaply. True, but investors need to think about what the market actually represents at any point in time. This year has made investors and companies alike think hard about how different the future might be. Many expect acceleration of disruption, and failures of companies once considered high quality blue-chips. Might the active/passive pendulum swing back?