Back Britain with a Bet on the FTSE 250
Investors are pondering the significance of the FTSE 250 index, questioning whether it is a stepping stone to greatness or a platform for mediocre companies. The quarterly reshuffle sees some companies leave the FTSE 250 to join the prestigious FTSE 100, while others get demoted.
The recent reshuffle saw Dechra, a veterinary pharmaceuticals business, Diploma, a supplier of essential components, and Marks & Spencer, a fashion leader, join the FTSE 100. Simultaneously, Abrdn, Hiscox, and Persimmon were relegated to the more domestic-focused FTSE 250.
This reshuffling coincided with Richard Buxton, the esteemed retiree from Jupiter fund management, expressing a gloomy outlook on the UK market, claiming it is in a “very sorry state” with a lack of natural investors. Buxton attributes this to various factors including Brexit, UK pension funds showing little interest in British shares, and the allure of Wall Street’s more favorable valuations.
However, it is important to consider the opportunities presented by the FTSE 250, whose collective worth amounts to approximately £323 billion. Although this is just a fraction of the capitalization of tech giants like Apple and Nvidia, which contributed to the 34% rise in the Nasdaq index this year, the FTSE 250 has experienced a slight decline of 4%.
A diversified portfolio requires companies of different sizes. Jean Roche, manager of the Schroder UK Mid-Cap investment trust, notes that even relatively smaller companies like Diploma have outperformed behemoths like Apple in the past year, making the UK mid-cap space a worthy consideration for long-term investors.
The FTSE 250 comprises mid-sized UK companies with strong financial standing and profitability, including Centrica, Dunelm, and several large investment trusts like Bankers. It also features Aston Martin Lagonda, which has been given a “buy” rating by Jefferies.
Dan Boardman-Weston of BRI Wealth Management acknowledges that the FTSE 250 has been more impacted by the economic downturn compared to its FTSE 100 counterparts, with a 23% decline since its peak in September 2021. However, he believes this downturn won’t last forever, highlighting that the FTSE 250 has delivered a return of nearly 470% over the past 20 years, outperforming both the S&P 500 and the FTSE 100.
The FTSE 250 currently has a price earnings (p/e) ratio of 12, lower than the average of about 21. It could also benefit from a potential Bank of England base rate rise. According to Martin Currie brokers, the FTSE 250 typically performs better than the wider market following a peak in interest rates.
Personally, I have been investing in British companies this year, anticipating a shift in perceptions. I have already invested in the FTSE 250 member investment trusts, Smithson and SDCL Energy Efficiency. I have also noticed attractive discounts on trusts like JP Morgan Mid Cap and Schroder UK Mid Cap Fund, which invest in FTSE 250 companies. These trusts hold stakes in businesses like Games Workshop, which has seen its shares rise by 21% this year.
While there are no guaranteed strategies in investing, I am betting on a range of investment trusts supporting the FTSE 250 as potential winners.
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