It’s fair to say that it’s been a disappointing year for the FTSE 100 index so far. While other major stock market indices such as the S&P 500 have recovered fully from the stock market crash in March, the Footsie has struggled to generate any real momentum. The index seems unable to break clear of the 6,000 point mark.
In time, the FTSE 100 should recover its recent losses. However, in my view, the recovery could be a slow and drawn-out process. Many FTSE 100 companies are experiencing significant challenges right now. Due to Covid-19, many stocks may not recover for a while. Some may not recover at all.
Don’t despair however. There are ways for UK investors to improve their investment returns. Here’s one simple move that could dramatically improve your returns in the years ahead if your portfolio is currently FTSE 100-focused.
Beat the FTSE 100 index
One of the easiest ways to potentially improve your returns if you’re a UK investor is to allocate some capital to UK companies that are outside the FTSE 100. By diversifying your portfolio and investing in top companies in indexes such as the FTSE 250 and the FTSE AIM 100, you can give yourself a better chance of generating strong returns.
There’s a very simple reason the Footsie is underperforming right now is many of its constituents are struggling to generate growth. Take the oil majors, Royal Dutch Shell and BP, for example. These stocks – which make up a large chunk of the index – have been hit by lower oil prices and the move towards sustainability. Both have cut their dividends in 2020. Meanwhile, banks such as HSBC, Barclays, and Lloyds have been hit by Covid-19 uncertainty and low interest rates. Growth isn’t easy to find within the FTSE 100 at present.
Outside the FTSE 100 it’s a different story. Here, there are plenty of UK companies growing at a rapid pace despite Covid-19. And many of these companies are delivering brilliant returns for investors.
For example, just look at ASOS, which is part of the FTSE AIM 100 index. It’s benefitted from the shift towards online shopping and, as a result, its share price has surged about 40% this year. Many analysts believe it can go higher.
Another UK growth stock that’s done well is video game development company Keywords Studios. The fellow FTSE AIM 100 company is profiting from the popularity of video gaming and e-sports. Its share price is up about 36% this year.
Then there’s a favourite small-cap of mine, dotDigital. It’s an under-the-radar UK technology company that offers an artificial intelligence-based digital marketing platform. It’s also benefiting from the shift towards online shopping and its shares are up about 32% this year.
Of course, I’m cherry-picking examples here. Not every UK stock outside the FTSE 100 has performed this well in 2020. But you get the idea. Having some exposure to UK growth shares that are outside the Footsie can make a massive difference to your overall returns. It has certainly made a difference to mine.
If you’re looking for ideas on under-the-radar growth stocks, you’ll find plenty right here at The Motley Fool.
Edward Sheldon owns shares in ASOS, Keywords Studios, dotDigital, Royal Dutch Shell and Lloyds Bank. The Motley Fool UK has recommended ASOS, Barclays, dotDigital Group, HSBC Holdings, Keywords Studios, and Lloyds Banking Group. 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.