Written by Laith Khalaf, head of investment analysis at AJ Bell
There was a big sell off in riskier areas of the market in 2022, but that hasn’t knocked risk-hungry strategies off their perch when looking at performance over the last decade.
Meanwhile low-risk safe havens have not served investors particularly well over a 10 year horizon. A typical Cash ISA has returned just 12%, and an investment in UK government bonds has returned just 3%, compared with CPI inflation over the same period of 30%. Perhaps more galling for bond investors is the 23.9% fall in the average gilt fund in 2022, an extremely steep loss for an asset that is generally held for its lack of volatility.
Looking back at performance can help to build a picture of where long term returns are likely to be harvested, but it doesn’t provide an infallible guide to the future. That is particularly the case now, a point at which we are departing the era of cheap money at quite a clip. The future is likely to be kinder to bonds and cash returns, now that interest rates have risen, and by the same token riskier assets may find greater competition from lower risk assets dents their performance, potentially in both relative and absolute terms.
The long run picture is quite clear though. Looking at data back to 1899, the Barclays Equity Gilt Study calculates that over ten years, there is around a 90% chance of UK equities outperforming bonds, and around a 75% chance of equities outperforming gilts. The next ten years is unlikely to substantially shift those odds, though it would also be unwise to bank on the extreme performance differentials of the last decade.
AJ Bell Investor Strategy League Table
|Total return10 Year||Rank (out of 27)||Total Return1 Year||Rank (out of 27)|
|Global technology fund||466.3%||2||-27.8%||26|
|MSCI World Momentum Index||301.2%||4||-7.4%||12|
|MSCI World Quality Index||290.7%||5||-12.4%||20|
|MSCI World Growth Index||253.0%||7||-20.3%||22|
|Global passive fund||198.5%||8||-8.8%||13|
|Global active fund||176.3%||9||-12.3%||19|
|MSCI World Value Index||171.8%||10||5.3%||6|
|Global ESG fund||166.2%||11||-13.7%||21|
|Global investment trust||142.1%||13||-20.7%||23|
|UK Small Cap investors||130.8%||15||-25.2%||25|
|Balanced managed pension fund||71.7%||20||-10.0%||15|
|Random fund selector||67.7%||22||-1.6%||8|
|Institutional fund investors||34.5%||24||-12.2%||18|
|Cash ISA savers||12.0%||26||0.8%||7|
|Bond investors (UK gilts)||3.1%||27||-23.9%||24|
Total returns in GBP to 31 Dec 2022
Sources: AJ Bell, FE, Morningstar, Nationwide House Price Index, Refinitiv, Investment Association, Bank of England, Cointelegraph
*theoretical total return for comparability, based on actual UK house price growth, assumed 4% net rental yield and assumed rental growth in line with prices
Full category definitions available below
Risk on top despite 2022 sell-off
“Bitcoin investors have enjoyed the best returns over the last decade by far, with £1,000 invested at the beginning of 2013 being worth over £1.6 million today, despite the cryptocurrency falling by 60% over the last year. Those who have sat out the crypto craze can console themselves with the fact that the number of Bitcoin believers who have captured the full ten-year return is probably as small as that number is large. Ten years ago, Bitcoin was little known, and even the very early crypto buyers would have had to watch their investment double in value 12 times to the peak in 2021, without cashing in any profits, in order to harvest the full ten-year return. They would also have had to casually sit by and not press the intense panic button as their investment fell by 73% in 2018.
“Wider technology investors have also enjoyed stellar returns over the last decade, with a passive global technology fund (L&G Global Technology Index) turning £1,000 invested into £5,663 over the last decade, despite losing almost a third of its value in 2022. Unlike Bitcoin, there will be plenty of investors who have ridden the technology wave, and so this category should be viewed as the most successful mainstream investment strategy of the last decade. The return of inflation and higher interest rates have dented the appeal of the technology stocks, whose valuation is often influenced by more distant future earnings. The likes of Apple, Amazon and Microsoft are indelibly interwoven into the fabric of everyday life, so can expect to continue to enjoy robust revenue streams, though the valuations they trade at may not return to the heights seen before the interest rate worm began to turn.”
Safe havens flop
“Bonds, cash and gold, have all flopped over the last decade, providing very meagre returns for investors in relation to other strategies. Bonds are now more reasonably priced and offer a better yield, but are still at risk of inflation proving stickier than anticipated. There may also be a glut of supply coming from continued high levels of government borrowing and the unwinding of the Bank of England’s QE scheme. Pension funds and insurance companies can normally be relied on to hoover these up, but the relaxation of Solvency 2 rules may well reduce their appetite for bonds, which is indeed part of the government’s plan to lure their capital into higher risk infrastructure projects.
“Cash has been a poor asset to hold over the last ten years, with £10,000 invested in a cash ISA 10 years ago now being worth £11,200, compared with £29,850 from a passive fund invested in the global stock market. The weak performance of cash in 2022 may come as a surprise, given this was a year of sharply rising interest rates. Returns in the last year were hampered by the fact that average Cash ISA rates have failed to keep pace with interest rate rises, and indeed with the most competitive deals. Shopping around for the best cash rates is always a good idea, but in 2023 it should be a more rewarding practice than it has been for some considerable time.
“Gold is seen as a safe haven, but it’s actually quite volatile, and its poor showing over the last decade is heavily influenced by it hitting high notes ten years ago, before falling back precipitously. The last year has seen positive returns for UK gold investors, though the lion’s share of this can be chalked up to a depreciation in the pound, as dollar returns have been significantly lower.”
Value v Growth: “Value stocks had a good relative year in 2022, returning 5.3%, compared to -20.3% from growth stocks. The 80% performance lead growth stocks still have over a ten year horizon shows that the recent value rally hasn’t be long or deep enough to overturn the longstanding hegemony of growth strategies. That said, the changing of the guard may yet have further to run, with higher interest rates potentially acting as a millstone around the valuations of growth companies.
Vice v Virtue: “Sin stock investors also had a good year in 2022, with the USA Mutuals USA Vice fund registering a 16.3% return, in stark contrast to the -13.7% return seen by the average global ESG fund investor. Over ten years, these sin stock investors are almost level pegging with global ESG funds, despite huge recent inflows into the latter sector. The USA Mutuals Vice fund invests in a portfolio of tobacco companies, drinks manufacturers, casino operators and defence companies. Basically the companies that service the less salubrious habits of the global population, and which are explicitly excluded from most ESG funds. The Vice fund isn’t available for sale in the UK, though its full portfolio is available in its annual report for any investors interested in replicating its investment strategy, which it describes as investing in sectors which have ‘exhibited resilient demand through economic cycles and have fundamental strengths that help explain why they’ve endured for centuries.’
Performance chasing v bargain hunting: “The last decade has delivered exceptional returns for performance chasers, defined as investors who each year buy the best performing fund sector of the previous 12 months. This is in stark contrast to bargain hunters, who buy the worst performing sector of the previous 12 months. The wide performance differential can perhaps be explained by the existence of longstanding trends over the last decade, which have seen the strong get stronger and the weak get weaker. Those trends were upended in 2022 however, with bargain hunters investing in Latin American funds and enjoying a 16.4% return, which catapults this strategy to the top of the league table over one year. This perhaps highlights the feast and famine experience both these strategies can lead to, though admittedly for performance chasers it’s been almost non-stop feasts for the last ten years.”
The world’s best investor
“Warren Buffett has definitely proved he’s still at the top of his game, with a 369.7% return over ten years. His 16.3% return in 2022 is almost all down to the dollar weakening against sterling though, rather than underlying portfolio performance. In dollar terms, Berkshire Hathaway was up just 4%, still a reasonable return given market conditions. Currency has helped longer term returns too, with dollar returns over ten years coming in at a still healthy 249.6%. This currency boon for UK investors is common across many of the categories in the Investor Strategy League, with the pound falling from around $1.60 ten years ago to around $1.20 today. This shows what a tailwind UK investors have enjoyed from weaker sterling, which shouldn’t be relied on to continue indefinitely.”
Appendix: Investment strategy definitions
All performance is presented on a total return basis in GBP.
Bitcoin – Bitcoin price
Global technology fund – Legal & General Technology Index fund
Warren Buffett – Berkshire Hathaway
MSCI World Momentum Index – MSCI World Momentum Index
MSCI World Quality Index – MSCI World Quality Index
Performance chasers – invest in the best performing fund sector of the previous 12 months, and switch investments at the beginning of each year
MSCI World Growth Index – MSCI World Growth Index
Global passive fund – average passive fund in the IA Global sector
Global active fund – average active fund in the IA Global sector
MSCI World Value Index – MSCI World Value Index
Global ESG fund – the average ESG fund in the IA Global sector
Vice fund – USA Mutuals Vice fund
Global investment trust – the AIC Global sector average
Landlords – an investment in the average UK property with no borrowing, price growth based on the Nationwide House Price Index, rental yields assumed to start at 4% net and increase in line with prices, income is assumed to be reinvested each year
UK Small Cap investors – Investment Association (IA) UK Smaller Companies sector average.
Egg spreaders – 20% invested in each of the following sector averages and rebalanced annually: IA North America, IA UK All Companies, IA Europe excluding UK, IA Japan, IA Global Emerging Markets.
60/40 portfolio – invest in a portfolio comprising 60% equities and 40% bonds, as represented by the Vanguard LifeStrategy 60% Equity fund.
Income investors – the IA UK Equity Income sector average.
Balanced managed pension fund – the ABI Pensions Mixed Investment 40-85% Shares sector average.
Herd investors – invest in the most popular retail fund sector of the previous twelve months, as recorded by Investment Association fund flow data.
Random fund selector – one of approximately 3,000 funds in the IA sectors selected at random each year.
Gold ETF – an average of three Physical Gold ETFs
Institutional fund investor – invest in the most popular institutional fund sector of the previous twelve months, as recorded by Investment Association fund flow data.
Bargain hunters – invest in the worst performing fund sector of the previous 12 months, and switch investments at the beginning of each year
Cash ISA savers – weighted effective interest rate paid on the average Cash ISA account according to Bank of England data
Bond investors – the IA UK Gilts sector average