The quarterly rebalancing of the FTSE 100 is a good opportunity for us to all take a moment, pause and reflect on what a monumental waste of time the whole exercise is.
There are many candidates for current financial orthodoxies that will make future generations weep with laughter. But our collective obsession with market-weighted indices must rank right up there. Here is a number that is quoted to us on the news every night, which simultaneously signals an unhealthy preoccupation with financial markets together with a severe lack of understanding about how they work.
What, pray, are we really to discern from daily price movements in the shares of just 100 of the UK’s largest publicly-owned companies? That looks like a big sample compared with elsewhere in the world: France’s CAC blue-chip index has just 40 constituents and Germany’s DAX a mere 30.
But the companies in the French and German indices are at least French and German. Back in April, Credit Suisse argued that the FTSE 100 was unlikely to be overly-affected by the UK election because 77pc of the earnings made by the companies that comprise the index came from outside the country. So it’s not even really British.
Sure, the long-term movements of the FTSE 100 may be a useful indicator of some broad trend. But as a day-to-day gauge of what is going on in the UK economy it is not much of a step up from haruspicy.
None of this would matter too much if it weren’t for a couple of things.
One is that central banks seem to be as much in thrall to these imperfect financial thermometers as the rest of us. It is widely believed that the US Federal Reserve was poised to finally pull the trigger on long-awaited rate increases in September but for some market turbulence in China.
It’s clearly true that one of the great economic growth engines of recent years is slowing down. But that was obvious before the Shanghai stock market’s Black Monday on August 24. Equally, the performance of China’s A-shares has long been divorced from reality – a product of rampant speculation rather than economic fundamentals. That the summer squall they suffered may have stayed the Fed’s hand, even a little, is utterly bizarre. Or perhaps not. Because the other dangerous thing about market indices is that so many of us invest our money in funds that track them. That’s not to denigrate passive investment, which gives investors access to the markets for a fraction of the fees charged by active managers. But if you are going to tie your savings to a given benchmark for years or even decades, you better be sure you really know what that benchmark is.
This is bad enough when it comes to equities. It might, for example, lead to people investing in the FTSE 100 when what they really want is exposure to the UK economy. Or it might result in them investing in the best known indices and hence the largest companies, which have already done most of their growing. And tracking indices effectively forces investors to buy high and sell low.
Even worse, however, are fixed income indices. The biggest constituents of these will, by definition, be the world’s most indebted companies and countries. Tracking these means investors buy more of an issuer’s bonds simply because it has issued more bonds. And that really is silly.
The benefits of billionaires
In an open letter to their new-born daughter, Mark Zuckerberg, the chief executive of Facebook, and his wife Priscilla Chan have promised to give away 99pc of the shares they own in Facebook to educational, medical and community causes over their lifetimes. Those shares, incidentally, are worth $45bn at current prices.
But, dear oh dear, this isn’t enough for some people. It has been pointed out that the Chan Zuckerberg Initiative will be set up as a limited liability company instead of a foundation or a non-profit corporation. It has even been suggested that this really means it’s an investment vehicle or even a humongous tax dodge. Some have advanced the argument that it would be better if Zuckerberg was simply taxed more and that the government then decide how best to allocate the money. The mind boggles.
Zuckerberg is one of a growing breed of philanthropists who have earned their fortunes in the world of business and want to apply the same zeal, business practices and often market forces that have helped make them money to giving it away. In 2010, for example, Bill Gates, the then chairman of Microsoft, announced he was going to spend $10bn over the subsequent decade in an attempt to develop vaccines that would eradicate some diseases.
Traditional charities may balk at the implied assumption that capitalist practices may be more effective than pure generosity. But it is clear that more giving does not necessarily equate to better giving. And it is hard to argue with what Gates, for one, has achieved; Gates predicted that polio would be a thing of the past by 2019.
By structuring his initiative as a limited liability company, Zuckerberg will also be able to lobby governments, something that nonprofits can’t do in the US. A spokesman has already said that any profits made will be ploughed back into the company.
Zuckerberg and Chan want to make as big a bang as they possibly can for their many, many bucks. I think the rest of us should just applaud the gesture and let them get them on with it.
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