An interesting article in Saturday’s FTMoney (18/6/2016) by Paul Lewis suggested that you might be surprised to learn that if you had invested £10,000 in a cash account in 1998, you would have done better than investing in a FTSE-100 index tracker. It’s surely odd for the Financial Times to persuade their own readers that cash is better than equities because a choice of cash might mean they no longer needed to read the FT – they could just use a comparison service such as Moneysupermarket.com once a year to pick the best deposit account. But nothing about the editorial policy of the FT surprises me of late after their persistent promotion of the Brexit “Remain” platform. Has the purchase of the FT by Nikkei started to affect its editorial policies one begins to wonder?
But back to the arguments put forward by Paul Lewis because if he is right then ShareSoc (which promotes individual stock market investment) might as well wind up. So it’s worth looking at the facts with some care.
His detail analysis is based on comparing an HSBC FTSE-100 index tracker with the best buy deposit account that was available each year since 1995. The HSBC index tracker is low cost (0.18% in charges p.a. he says) and is one of the few that goes back that far. So that is fair enough, although selecting a specific time period when the stock market is widely variable in level over the years might have been prejudicial. Picking the “best buy” cash deposit also somewhat slants the picture because the deposit accounts offering the best interest rate are likely to be smaller and less known ones which few people might select – for example they might be more risky. Now Mr Lewis identifies that Charter Savings Bank is paying 1.66% for one-year fixed rate bond, and Moneysupermarket suggest OakNorth Bank at 1.61% and Habib Bank Zurich at 1.51% – not exactly household names. The better known Sainsbury Bank only offers 1.30% and that only for deposits of up to £200,000 at the time of writing. As any investor knows, a small difference in interest rates, compounded over many years, will make a big difference to the outcome. But Mr Lewis claims cash beat shares in 57% of the five year periods beginning each month in 1995.
This kind of analysis is not new to me because the author of the book “Monkey with a Pin” (which is on our recommended reading list) came to similar conclusions a few years back. It is difficult for private investors to beat cash returns because their equity investments via funds are eroded by charges, many of which are hidden.
One big defect in this argument is of course that only a fool would have been solely invested in the FTSE-100 in recent years. This is an index dominated by mature companies in sectors that have been strategically challenged – oil/gas, minerals, pharmaceuticals, or which have simply hit an exceptional economic and regulatory crisis such as banks which might be one of those “black swan” events that only happen once in a hundred years.
Mr Lewis does point out that the Barclays Equity Gilt Study, which is published annually, shows equities outperforming Treasury bills or cash over long periods of time (their data goes back to 1899), but he argues that is because the charges on equity funds are not included, and cash does not reflect the real rates obtainable.
Of course there are many more equities that could be invested in than solely the FTSE-100; for example foreign stocks/markets, FTSE-250 and small cap stocks, even AIM stocks. One just has to look at the long term performance of some of the large investment trusts to see that they have consistently beaten inflation, which cash has not. Indeed cash and government bonds have been particularly poor during periods of high inflation while owning part of a business via an equity stake actually inflation proofs your portfolio to a large extent.
Even the editor of Investors Chronicle when commenting on our campaign to improve AIM pointed out that in “pure performance terms, the AIM market has actually outperformed the FTSE-100 over the past year” (Editorial in 10 June edition). Before you get too excited though one of our correspondents pointed out that the AIM index is grossly distorted because it does not take account of companies leaving the index – a lot of which may subsequently have fallen on hard times. So as ShareSoc keeps warning people, you have to be selective about AIM stocks and it is not a market for the inexperienced or unsophisticated investor at present.
But in conclusion, I regret to say I am not convinced by Paul Lewis’s article mainly because I know that I have done a lot better than cash over the years myself. I can only go back in my records (which are very detailed) to 1997 but my average total return (dividends plus capital) have exceeded 20% per year. There are other well known investors such as John Lee who writes for the FT who have achieved similar figures, and Warren Buffett has done even better. Indeed I suspect other ShareSoc directors and members have done as well or better without knowing their exact performance figures. This suggests that you simply have to take a more intelligent approach when investing in equities than simply selecting a FTSE-100 tracker.
Roger Lawson
I think all this shows is that the FTSE 100 has been a very poor investment – it’s highly concentrated, and the areas it’s concentrated in (banks, mining, oil, telecoms and pharma) have ranged between pedestrian and disastrous. I’m not sure what’s worse, encouraging people to put all their money in the FTSE or to put it all in cash!
In 1998 the FTSE hit 6000 for the first time, having doubled in the previous three years. It’s still around 6000 so obviously a poor result. By contrast the mid-250 index, much more representative of UK shares in general, was around 5000 in 1998 and is 17000 now, rather a different picture. Likewise the famous comment about irrational exuberance was in 1996 when the Dow hit 6000 – now it’s 18000.
On the other side, interest rates were much higher in 1998. I seem to remember the egg savings account paying 8% at launch, now you’re pushed to get over 1%. Assessing the relative merits of 8% interest or the FTSE at an all-time high with a yield of 2% is rather different to the current state of 1% interest vs a moribund FTSE with a yield of 4% (not that I think the FTSE 100 makes any more sense as a portfolio than it did then).