Online takeaway leader Just Eat, packaging company DS Smith and health & safety analysis technology specialist Halma will all be added to UK large-cap trackers following the latest FTSE 100 rebalance. 
Investors who seek exposure to UK equities via passive vehicles may typically hold FTSE 100- or FTSE All Share-tracking funds, which have a higher weighting to large-cap stocks.
It has been a relatively subdued year for the FTSE 100 index as a whole amid historically low volatility with just nine changes made to the index.
Russ Mould, investment director at investment firm AJ Bell, said: “For the year as a whole, the entry of Scottish Mortgage Investment Trust and Just Eat, for example, highlight investors’ ongoing hunger for growth stories.
“Halma’s promotion is a deserved reward for dependable earnings and dividend growth while the return of both Segro and Berkeley showed how commercial and residential property remain central to the UK’s economic fortunes.
“Meanwhile, the relegation of Capita, Hikma, Dixons Carphone, ConvaTec, Merlin and Provident Financial shows how the market is in no mood to tolerate earnings disappointment.”
In the latest rebalance, the most well-known name for many will be online takeaway giant Just Eat, which has enjoyed a strong run since its launch in 2014, having risen by 187.99 per cent.
Performance of stocks since launch
Source: FE Analytics
“Online food order and delivery service Just Eat’s arrival in the UK corporate elite is all the more remarkable as it was only floated in April 2014,” Mould said.
The shares floated at 260p but have risen to close on Tuesday at 820p, giving the firm a market capitalisation of £5.6bn – bigger than Marks & Spencer, Sainsbury’s and Morrisons.
With the acquisition of semiconductor maker ARM Holdings by Japan’s SoftBank last year, many managers have been quick to highlight Just Eat as one of the few major technology-themed companies in the UK market.
“This shows how the internet places a focus not just on price but on service and Just Eat’s success is testimony to its ability to harness the power of both technology and consumer satisfaction,” Mould said.
“The asset-light model relies on partners and word-of-mouth [customer reviews] as well as its scalable platform in a great example of how the internet can be used to create a powerful and profitable business model.
Analysts expect the company to generate pre-tax profit of £137m in 2017, up from £91m in 2016 but is still well short of the £576m, £549m and £376m expected of M&S, Sainsbury and Morrisons (on an adjusted basis) for their current financial years.
“They may be more profitable but Just Eat is valued more highly as the market takes the view it has the superior growth prospects,” Mould said.
However, with the likes of Deliveroo, UberEATS and Amazon Restaurants all entering the market in recent times, Just Eat operates in a “fiercely competitive market place,” he added.
The second name on the list is packaging firm DS Smith, which joins rival Smurfit Kappa in the big leagues followings the former’s promotion in December 2016.
Both firms have ridden the online shopping boom and consolidation within the industry, Mould said, with DS Smith having a substantial overseas presence.
“This minimises the impact of Brexit and brings benefits in the form of a weak pound, while it can also point to a track record of consistent earnings and dividend growth,” the investment director said.
The stock struggled to make ground in its first 15 years since its launch in 1995, losing 1.68 per cent over the period, but has come on strongly since then, rising by 292.09 per cent over the past decade.
Performance of stocks over 10yrs
Source: FE Analytics
“DS Smith does not offer premium dividend yield relative to the FTSE 100, at 2.8 per cent, but the company did unveil its ninth consecutive increase in its annual shareholder pay-out alongside its full-year results in June and history shows that those firms capable of consistently growing their dividend over time provide the best total returns to investors,” Mould noted.
The final stock upgraded to the FTSE 100 is Halma, following a storming recovery since the financial crisis, as the below chart shows. Like DS Smith, the company struggled to make much headway between 1995 and 2009 but has since kicked on.
Performance of stocks since launch
Source: FE Analytics
The company increased its first-half dividend by 7 per cent, meaning that the firm, which has increased its annual pay-out by at least 5 per cent for every year since 1980, looks set to do so again in 2017.
“Such consistency is evidence that the firm offers much that is ideal from an investment perspective: the mandatory nature of investment in its products, owing to health & safety regulations and concerns, creates consistent business flows and sticky customers, a combination which provides a degree of pricing power,” Mould said.
“That in turn can mean high margins, good returns on capital, strong free cash flow and that consistent dividend growth record.
“The only tricky issue as the company makes it to the top flight is the shares’ valuation. A multiple of 30x forward earnings is twice that of the FTSE 100 and such a rating leaves no margin for error, either at company or a wider market level.”
Conversely, medical device specialist ConvaTec fell out of the FTSE 100 after a profit warning last month, having joined the large-cap index in December last year.
“The share price has never really recovered from that one-day plunge of more than 20 per cent and it could take some time for it to recover the credibility that was lost,” Mould noted.
Legoland and Alton Towers owner Merlin Entertainments has also fallen from grace as the firm’s profit warning last month.
Despite bouncing back from a devastating accident on one of the rides at Alton Towers last year, a spate of terror attacks across several major cities, including London and Manchester, have taken its toll and profits are now expected to drop slightly in 2017.
Finally, engineering firm Babcock International is the only company that has been dumped out of the index despite not issuing a profit warning and a proud record of consecutive annual dividend increases that stretches back to 2003.
“However, the shares have suffered a grinding fall as investors have become increasingly sceptical of the support services sector overall – after the profit alerts and share price plunges at Capita, Serco, Mitie, Carillion and others – and also wary of the possible impact of the Government’s austerity drive upon defence budgets,” Mould noted.