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The FTSE 100 is a rich hunting ground for elite UK shares. Conceived in Thatcher’s Britain, it quickly became the country’s leading stock market indicator. Today, it’s easy to gain broad FTSE 100 exposure via low-cost index funds.
But how has the Footsie performed compared to the S&P 500 recently? Should investors consider looking for individual stocks with the potential to outpace Britain’s premier benchmark?
Let’s explore.
Index returns
14 May 2019 was a big date for index investors. On this day, asset management giant Vanguard launched exchange-traded funds (ETFs) tracking the FTSE 100 and S&P 500.
Including dividend reinvestments, £10,000 put into Vanguard’s FTSE 100 UCITS ETF (VUKE) at its inception would be worth £15,065.21 today. That 50% gain looks decent at first glance!
However, there’s a fly in the ointment. Vanguard’s S&P 500 UCITS ETF (VUSA) significantly outperformed its UK counterpart, rising 133% over this time period.
Individuals who invested their cash in the US ETF would have £23,336 today. Those juicy compound gains add up over time.
Winds of change?
Despite shining on dividends, the UK index lacks cutting-edge growth shares. Technology stocks represent just 1% of the FTSE 100 ETF. That’s dwarfed by a 32.5% allocation for Vanguard’s US tracker.
Essentially, a tech boom stateside has powered a colossal bull run in US stocks, while homegrown equities have struggled to keep pace. It’s an uncomfortable dynamic for British investors to grapple with.
But fear not, FTSE 100 fans! I have some good news. Vanguard’s forecast for US stocks’ 10-year annualised return is just 3.9%. Regarding UK shares, anticipated gains are almost double at 6.7%.
Attractive valuations for British equities sit at the crux of the fund manager’s logic. The Footsie’s average price-to-earnings (P/E) ratio of 16.4 compares favourably to a 27.5 multiple for the S&P 500. Whether this is enough to stop the UK stock market’s relative decline remains to be seen.
A potential FTSE 100 gem
Index funds warrant a place in most portfolios, especially for those getting started in investing. However, it’s also worthwhile to consider individual FTSE 100 stocks, although this brings greater risks.
One that merits contemplation is 3i Group (LSE:III), a closed-ended investment fund focusing on private equity and infrastructure.
The 3i Group share price has advanced 316% in five years. These mighty gains can primarily be attributed to a single position accounting for 70% of the company’s portfolio, Dutch discount retailer Action.
This unlisted firm operates 2,750 stores across 12 European countries, selling low-cost household goods. With limited numbers of SKUs and spartan stores, Action aims to undercut supermarket competition by keeping overheads down. What’s more, 80% of products are priced under €5.
Growth has been spectacular, driven by Action’s aggressive expansion beyond Europe’s northern shores and its fast turnover strategy. 3i Group initially invested in the business in 2011 for €279m. That position was worth a whopping €17.1bn in December 2024.
However, I have some concerns. There’s an obvious concentration risk in 3i Group’s portfolio. That’s especially worrying if Action’s growth slows down. A reliance on constant expansion could cause problems if new store openings begin to wane.
That said, even if 3i Group’s a one-trick pony, its huge return on investment thus far must be admired.
