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Investing in UK shares with the largest market capitalisations is a popular wealth-building tactic in Britain. These businesses have historically been quite stable. And that’s proven to be quite a handy advantage during all the recent inflation-induced volatility that’s plagued other areas of the stock market.
So let’s take a look at how much money investors have been making since 2020.
Starting with the FTSE 100
Let’s begin by looking at passive large-cap index fund investors. A quick glance at a share price chart reveals the FTSE 100‘s up by around 45% over the last five years. But factoring in the extra juicy dividends of these enterprises, the total return jumps to 80% – almost double.
On an annualised basis, that translates to just shy of 12.5% – enough to turn a £10,000 initial investment into £17,980. This achievement becomes even more impressive comparing it to the performance of the FTSE 250.
The small- and mid-cap index has historically been the outperformer since smaller businesses have more room to grow. But over the same period, investors in this growth index have only reaped a 44% total return – almost half of what the FTSE 100 delivered. Yet, when zooming into individual large-cap companies like stock pickers do, both of these indices are left in the dust.
Stock-picking winners
Buying shares in individual companies can be a risky endeavour. After all, not every large-cap stock offers stability, and none can guarantee positive returns.
A perfect example of the risk stock pickers take is Ocado. Despite enjoying an explosive run-up in the second half of 2020, the online grocery/warehouse automation business has since seen all of its gains wiped out as operating costs surged. The stock was later demoted from the FTSE 100 in 2024, transforming a £10,000 initial investment from June 2020 into just £1,300 today.
But it’s been quite a different story for Rolls-Royce (LSE:RR.). Despite being initially crippled by the pandemic, a new management team was able to turn the engineering giant from a leaking ship into a rising star. Operational streamlining, combined with unfortunate workforce reductions, got free cash flow generation back on track. In turn, profit margins were repaired, debt burdens reduced, and revenue growth restored.
These factors combined resulted in a massive 675% return for shareholders over the last five years. As a result, the same £10,000 investment’s now worth a whopping £77,500!
Moving forward, Rolls-Royce has several challenges to overcome. A lot of its long-term growth potential is tied up in its experimental small modular reactors and UltraFan aircraft engine. But neither of these technologies has proven their commercial viability yet. And with competitors pursuing similar projects, the race is on to deliver results.
More immediately, Rolls-Royce has to tackle the cyclical nature of the aviation industry. Right now, it’s enjoying recovery and growth tailwinds. But should demand waiver, the group’s impressive recent growth could start to slow. And with plenty of debt still left to eliminate, a slowdown could create a new wave of headaches for this business.
Nevertheless, Rolls-Royce serves as a prime example of the potential explosive gains large-cap UK shares can deliver. And with an impressive long-term pipeline of projects, the stock might still be worthy of closer inspection.
