Why it’s never been easier to beat the FTSE 100

Outperforming the FTSE 100 (INDEXFTSE: UKX) may be a lot simpler than many investors realise.

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The FTSE 100 has enjoyed a sustained period of growth. It has risen from around 3,500 points in March 2009 to its current level of around 7,425 points. That’s an annualised growth rate of around 8.2%, which is an impressive rate of growth. When dividends are added to the figure, the FTSE 100 has delivered a total return of around 12% over the last nine-and-a-half years.

Future prospects

The outlook for the FTSE 100 may continue to be positive. Brexit could provide a boost if investors remain uncertain about the prospects of the UK leaving the EU in just over six months. It may cause the pound to weaken, which could boost the international earnings of FTSE 100 shares that report in sterling. And with the index presently yielding around 4%, it still seems to offer good value for money versus its historic income return level. As a result, its investment prospects appear to be bright over the long term.

Outperformance potential

Beating the index, though, could be easier than many investors realise. Despite the FTSE 100 having risen significantly in the last decade, there are a number of shares within it that have failed to deliver on their long-term potential. Industries such as healthcare, tobacco, retail and utilities continue to offer significantly better value for money than the wider index, with investors seemingly disinterested in their investment potential at the present time.

Rewind a decade, though, and the very shares that have helped to propel the FTSE 100 to record highs were generally unpopular. Cyclical stocks were being hit hardest by the financial crisis, and their valuations offered wide margins of safety. While they may have underperformed the index in the short run, in the years since the financial crisis they have offered stunning returns in many cases. As such, buying unpopular stocks with low valuations today could be a sound means of outperforming the FTSE 100 over the next decade.

Bullish sentiment

Of course, investor sentiment remains bullish at the present time. The world economy is performing well, and this could lead to further share price growth over the medium term. As a result, buying mid-cap or small-cap shares could be a good idea for investors who are trying to beat the FTSE 100. While they may offer greater risk and volatility than their large-cap peers, their reward potential could also be higher.

For example, the FTSE 250 has delivered an annualised total return of around 17% since its March 2009 low. Picking the best value stocks in the mid-cap index could lead to higher returns in the long run than the FTSE 100 is able to offer. And while Brexit is a risk to a large number of smaller companies, in many cases its potential threat has already been priced in. As such, now could be a good time to set out to beat the FTSE 100 over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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