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FTSE 250 hits all time-high – what it means for markets and the UK

Like fans of England’s football Championship know, the top league is not always the most exciting

City of London
In the shadows of the giants, future legends are born

The FTSE 250 index this week climbed to its highest point since before the coronavirus crisis and in doing so notched up a new all-time high.

Acolytes of New York’s major stock indices might scoff, with the S&P 500, Dow Jones and tech-powered Nasdaq celebrating a new top spot seemingly every other day, but for UK investors the landmark is more significant than might first be obvious.

Defining our terms is important here, as the FTSE 250 is different from other indices in a number of ways.

For one, it is the repository for London stock exchange’s mid cap stocks, from the 101st to the 350th largest, meaning its most successful handful of constituents are automatically promoted to the FTSE 100 every quarter – with ITV (LON:ITV), Royal Mail (LON:RMG), Dr Martens (LON:DOCS) and Electrocomponents (LON:ECM) current favourites for promotion – which would seem to undermine its capacity for growth.

But more helpfully, being a moveable feast, or a continuous spectrum of companies, also means new, fast-growing companies are joining from the small cap ranks and the embattled and failing are dropping out the bottom of the index too.

Like fans of England’s football Championship know, the top league is not always the most exciting.

Being a benchmark for London’s second tier does not make the 250 second-rate, as actually it includes many dynamic companies bustling their way upwards – think Ocado (LON:OCDO), Future (LON:FUT), Aveva (LON:AVV), Entain (LON:ENT) in recent years – and excludes some of the low-growth behemoths in the tier above.

For some years now, the FTSE 250 has been seen as a better reflection of the UK economy than the Footsie 100 because of the smaller sibling’s constituents offer a greater domestic focus, and the overseas leanings of many of London’s blue chips.

The new all-time high for the mid-cap index has come after a 24% tear since the start of November as Britain got the jump on the rest of the world with its vaccination rollout.

Investors, such as your correspondent, were buying trackers of the index even before this as UK stocks seemed to be undervalued due to Brexit concerns, though this seems still to be unravelling.

So, is the FTSE 250 still worth buying?

“The fact an index hits a record high is not itself a buying signal, but the attraction of investing in medium-sized companies are plain to see in the long-term performance figures,” says financial analyst Laith Khalaf at AJ Bell.

He noted that over the past twenty years, the 250 has wiped the floor with the 100 and indeed the much-vaunted S&P 500. 

“I think FTSE 250 outperformance probably comes down to size - it's easier for more modestly sized companies to grow," Khalaf tells me.

“It’s also a much more diversified index. The top ten constituents make up 10-11% of the whole index, whereas just the top five of the FTSE 100 make up 23%. So there’s a lot less stock-specific risk, which has hampered the FTSE 100 (until recently) thanks to its heavy exposure to cyclical areas like banks and oil companies."

“Overall I guess it depends on when you think the best period of share price performance for a company is, and the figures seem to firmly suggest it's in the FTSE 250 stage, followed by the small cap stage. I think it's probably more nuanced than that when you drill down, but at a broad level that’s what the numbers show."

The strong performance of the FTSE 250 should also be a tailwind for UK focused investment trusts and funds as a whole, Khalaf added.

“Fund managers can often find better opportunities in medium-sized companies, as these are less well researched by global analysts. They are small enough that they still have room to grow, but large enough that they are established businesses with existing customer bases.”

As noted by Khalaf, the FTSE 250 is more domestically focused than its larger relative, but still has a fair share of companies deriving a healthy slug of their earnings overseas, such as cruise line operator Carnival (LON:CCL), travel operator Tui (LON:TUI), and software company Microfocus International (LON:MCRO), and is home to a large number of investment trusts that invest outside the UK, such as Fidelity China Special Situations PLC (LON:FCSS), Schroder Asia Pacific Fund PLC (LON:SDP), and JPMorgan Japanese Investment Trust PLC (LON:JFJ).

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