Image source: Ocado Group plc
The FTSE 250 index of medium-sized companies does not always get the same level of attention as the blue-chip FTSE 100.
But I own some FTSE 250 shares and like the fact that up and coming firms can offer growth prospects that might be harder to find when looking at mature companies.
Poorer performance than the FTSE 100
So, if I had put £1,000 into the FTSE 250 a year ago, what would that investment now be worth?
During the past 12 months, the index has increased in value by 8%.
Therefore, if an investor had put £1,000 in 12 months ago, it should now be worth around £1,080. That is not bad, in my view, but it is also notably below the 13% capital growth achieved over that period by the FTSE 100.
There are dividends too. The yield is currently 3.3%. Again, not bad I feel, although not quite as attractive as the 3.6% currently offered by the FTSE 100.
Why I don’t buy the index
The FTSE 250 is supposed to contain growing companies, so what might explain its recent underperformance versus the blue-chip index?
All companies face risks, but smaller companies may lack the resources and experience to handle them as well as mature firms that have been around for decades (or in some cases, for centuries).
Also when a FTSE 100 business loses enough value it gets booted into the FTSE 250 and vice versa.
So the smaller index loses some companies that have growing share prices, while FTSE 100 businesses that decline sharply enough move down into the FTSE 250. Ocado is an example.
That means that the FTSE 250 almost by design has some disadvantages compared to the bigger index.
But the main reason I do not invest directly (for example, through a fund) is the same for both: I prefer to try and find individual shares I think can potentially do better than the index overall.
Is that possible? Yes, but it is not necessarily as easy as it may sound.
In the wrong lane
As an example, consider a share I used to own: Hollywood Bowl (LSE: BOWL).
Over the past year, its price has fallen 5%, substantially underperforming the index. Its dividend yield of 4.3% is better, but even considering that, an investor would have done worse putting £1,000 into Hollywood Bowl shares a year ago than the FTSE 250 overall.
Yet the business is profitable and is growing handily, thanks both to its UK business and to rapid expansion in Canada.
Is this a short-term share performance problem, then?
No. Over five years, the Hollywood Bowl share price has lost 1%. Then again, during that period the FTSE 250 overall has gone down 4% so Hollywood Bowl has done a bit better in relative terms (although not by much, frankly).
With large customer demand, an extensive network of bowling lanes (and some miniature golf sites) and a proven business model, I see a lot to like about Hollywood Bowl.
But one risk is a weak economy hurting consumer spending on leisure activities like bowling. So although I like the investment case, the current price-to-earnings ratio of 16 is a bit high to grab my attention. I will not be investing again just yet.
