The FTSE 250 is an index of medium-sized companies listed on the London Stock Exchange. They may not be bigger than those of the FTSE 100 but are still significant businesses. Among members of the FTSE 250 are household names such as Tate & Lyle, easyJet and Marks & Spencer.
If I had £250 I wanted to invest in FTSE 250 shares today, here is how I would go about it.
Going for growth
For me, one of the interesting things about the index is the way it can offer me exposure to growth companies that are still developing.
That might not be obvious from the list above, with companies like Marks & Spencer essentially fallen angels that, in better days, were in the FTSE 100. But elsewhere in the FTSE 250, the growth angle becomes clearer. For example, cybersecurity company Darktrace, song fund Hipgnosis and Oxford Instruments are among the index members I expect could post strong revenue growth in coming years.
That does not mean I would ignore the income prospects of FTSE 250 firms. Indeed, I part-own companies like abrdn and Direct Line largely because of the income potential I think they offer my portfolio. But when it comes to growth, I think the FTSE 250 can offer me exposure to some compelling growth stories.
I would want to invest my £250 across more than one company to give me some diversification. So I would either put it all into two growth shares, or split it evenly across one growth share and an income pick.
Focus on proven profitability
But one mistake I try to avoid when it comes to growth shares is investing too early. If a company is still lossmaking, it might need to raise more funds in future and dilute existing shareholders.
Darktrace, for example, turned a post-tax profit last year. But it was only $1.5m, after a $145.8m loss the year before. I would hope to find more consistent evidence of profitability than that.
Meat producer Cranswick, for example, has been consistently profitable for years. Last year, its post-tax profit grew by 12%. Risks like inflation could hurt future profits. But a track record of proven profitability often helps to increase my confidence in a company’s business model, especially if I do not foresee big changes in its marketplace or competitive advantage.
Consider valuation
As well as profitability, I would also consider the valuation of any FTSE 250 share before buying it for my portfolio. Even a good business could make a poor investment if I pay too much for its shares.
Oxford Instruments is an example of this. Although I like the business, its price-to-earnings ratio of 28 is too high for my tastes. I would keep an eye on Oxford Instruments in case its financial performance improves, or share price falls. But I would not buy it for my portfolio at the current share price.
In the long term, no matter how good a business is, the price I pay for its shares will affect the returns I earn from it. There are a number of solid FTSE 250 businesses I think currently have an attractive share price. So I would focus on them when building my portfolio.
