Why does my portfolio not match the performance of the the FTSE 100?
.png)
When comparing diversified investment portfolios with the performance of the FTSE100, it’s important to highlight how the underlying investment structure of a risk adjusted portfolio differs from a single stock market index.
Below is an example of a medium risk, balanced portfolio and shows the breakdown of the underlying asset class weightings:
Fixed Income 22.10%
Equity 57.40%
Property 0.00%
Alternatives 17.00%
Cash 3.50%
If the FTSE100 is holding up so far this year, what is impacting other investments?
Economic confidence remains mixed given the Ukraine and Russia conflict. While the initial shock and uncertainty has been priced into global equities, the longer-term effects remain difficult to quantify and financial markets have historically not been receptive to a broad range of data points with an even wider range of investment outcomes.
So far this year, the UK has shown strong resilience due to its exposure to materials and energy, which can pass the cost of inflationary pressure to customers. The picture has been similar since the start of the year, with shares of larger companies rising. This was driven this month by the mining, healthcare, and oil sectors, while small and mid-cap equities recorded losses. One change from January was a greater presence of more traditionally defensive sectors among the market’s outperforming areas. These included consumer goods, drinks, and utility companies, to take three examples.
How economic conditions could impact portfolios containing growth stocks
Growth stocks are the shares of companies which typically grow at a higher rate than the market average.
The macro headwinds mentioned above are currently feeding into the globally allocated equity holdings of portfolios and, so far, 2022 has seen a notable “correction” in growth stocks. This is particularly prevalent in the US, China, and the emerging market regions.
The share prices of growth stocks are highly sensitive to their projected future earnings, which, right now, are coming under pressure due to rising inflation expectations and uncertainty over how long inflation will remain elevated for. An addition, some growth companies can be more “cyclical” in nature i.e., they follow the investment cycle of expansion, peak, contraction, and trough.
This means that these types of company tend to outperform during the expansionary stage and peak stages and underperform during the contraction and trough phases of the investment cycle.
What if my portfolio contains value stocks?
Value stocks, on the other hand, are companies which trade below their intrinsic value. Many UK listed stocks would be considered value stocks.
These business types have tended to be more resilient to the current inflationary challenges, hence the relative outperformance you may have noticed in UK stocks this year.
Many portfolios will contain relatively low weightings of UK equity in comparison to other assets and geographies. This can mostly be attributed to a strategic approach to diversification as portfolio managers seek to reduce concentration risk and mitigate the volatility or uncertainty individual markets may experience.
Diversification is key to outlasting market conditions
As market movements occur, the performance of different asset classes will vary. Layered over this are the differences felt at a geographic level too. To outlast changes happening both on a macro and microlevel, a portfolio of diverse and varied investments is required. This will enable investors to experience different performance at different times across their investments.
The FTSE100 index reflects performance of shares listed on the UK stock market only. A diversified range of asset classes and geographies will, therefore, not mirror its performance.
Any information contained in this commentary must not be construed as giving investment advice within or outside the United Kingdom. Past performance is not a reliable guide to future performance. Capital at risk.