Residential property returns are regionally sensitive and so returns in some locations may vary considerably from our estimate. We have also modelled a cash investment in property with no borrowing, to provide a level comparison with other investment strategies. However, many landlords will have turbo-charged the returns on offer by leveraging up with mortgage debt and benefited from historically low interest rates. That will be offset to some extent by high transaction taxes and fees, in particular stamp duty. After a bumper period for sales driven by the stamp duty holiday, most expect 2022 to be a quieter year for the UK property market. That doesn’t mean returns will entirely dry up however. Interest rates are still low, as is unemployment, and a shift to flexible working is likely to continue to encourage some consumers to move home, driving transaction volumes, and underpinning prices.
ESG champions invest in the average global ethical fund, and they have significantly outperformed sin seekers, over both one and ten years. There are no packaged products available to UK investors which invest in sin stocks, so we had to reach across the Atlantic for a proxy for this investment style. The USA Mutuals Vice fund has been running since 2002, and invests in tobacco, alcohol, gambling and defence sector stocks. It doesn’t invest in oil and gas sectors though, or it might have had a more fruitful 2021. Over ten years the Vice fund is in the bottom half of the table, though it had actually performed pretty well against the MSCI World Index until the last two years. It seems the writing may be on the wall for sin stocks, given the increasing focus on ESG credentials. However, 2021 was not a particularly outstanding year for global ESG funds, which fell behind a simple passive approach (international indexers). Things look better over a ten-year time period though, where ESG funds have beaten the typical tracker fund and also the average active fund (global stockpickers). It’s only very recently that ESG investing has hit the mainstream, though it does look here to stay, and longer term may simply become part of almost every fund’s investment process, to a greater or lesser degree.
Elsewhere in the global equity space, global stockpickers, international indexers and investment trust investors are all tightly bunched in the performance table over ten years. These categories comprise the average global active fund, average global passive fund and average global investment trust respectively. (There will be an element of survivorship bias in the global stockpickers, international indexers, and ESG champions categories). All three fall considerably behind three factor-based approaches however – growth investors, quality investors, and momentum investors. While the MSCI indices that represent these styles are constructed using separate methodologies, all roads lead to Rome, or in this case, the tech sector. These indices hold 38%, 39% and 34% in tech respectively, compared to 24% from the MSCI World Index, which provides a benchmark for most active and passive funds in the global sector.
The tech sector finds itself with such a heavy weighting in the MSCI factor indices, because over the last ten years the big US tech stocks have exhibited growth, quality, and momentum characteristics. The strong performance of the tech sector goes a long way to explaining why growth, quality and momentum investors have done so well in the last decade. Indeed over ten years, the top 5 performing strategies in the Investor Strategy League have been elevated by technology exposure. The other factor index, MSCI Value, has just a 9% exposure to the tech sector, hence why it sits so far below the others over ten years. 2021 was a brighter year for value investors however, thanks to the resurgence of the economically sensitive areas that feature more heavily in this strategy, like energy and financials. Despite the value rally in 2021, quality investors still ended the year with their noses just ahead though.
In UK Equities, small cap investors sit near the top of the league table over both one and ten years, but haven’t quite been able to disrupt the hegemony of tech dominated strategies. Small cap investing sits at the riskier end of the spectrum, but has delivered outsized returns over the long term, particularly when combined with active management. Income seekers investing in UK Equity Income funds enjoyed a strong year in 2021, with many UK dividends coming from oil and gas companies, miners and financials, sectors that have enjoyed improved fortunes since vaccines arrived on the scene.
Over ten years the returns from a UK Equity Income portfolio have been less impressive, with this strategy faring worse than a 60/40 portfolio, or indeed a property investment. This has been a period when the economically sensitive UK stock market has been out of favour, battered by the financial crisis, Brexit, and the pandemic. However, stocks are a useful source of long-term income, and the UK stock market is one of the best income payers, largely because cyclical old economy stocks like banks, insurance companies and mining firms tend to pay more of their profits out as dividends, compared to growth companies which prefer to use cash for re-investment within the business. Unlike a property investment, the tax payable on UK Equity Income funds can be carefully managed too, using SIPPs, ISAs, and the annual capital gains tax allowance.
Herd investors, who invest in the most popular retail fund sector of the previous 12 months, have had a bright few years – the global sector has been the most popular, and one of the best performing, for three years now. Longer term, these investors rank 22nd out of 27 strategies though, behind their nemeses, contrarian investors, who invest in the least popular fund sector of the previous twelve months. That’s largely because the most popular sector in the last ten years has included lower risk areas like absolute return funds, bonds and mixed asset funds. Meanwhile the contrarian approach has been dominated by the UK All Companies sector, which was the least popular sector in seven of the last ten years. While UK equities might not have performed as well as other regional stocks, the higher risk and reward profile of equity investments means they have still beaten lower risk asset classes.
Egg spreaders have performed better than both herd investors and contrarians over the last ten years. These investors simply spread their investment equally over five equity regions – the US, UK, Europe, Japan, and Emerging markets, rebalancing their portfolio at the beginning of each year. This approach has failed to beat a global passive approach though, reflecting the dominance of the US stock market, which makes up around two thirds of a global passive approach, compared to just 20% of the egg spreader’s portfolio. The most popular fund sectors with institutional fund investors haven’t fared well at all, ranking at the bottom of end of the league table over both one and ten years. The most popular institutional sectors over the last year have tended to be low risk – absolute return funds, money market funds, and volatility managed funds. This may be because large institutional investors manage direct equity portfolios themselves and use funds to gain exposure to areas where they don’t have in-house expertise.
In the mixed asset sectors, 60/40 investors (60% equities/40% bonds) and pension default investors find themselves in the bottom half of the league table over both one and ten years. Seeing as these strategies seek to limit equity risk this is perhaps not surprising. However, it does suggest that many pension investors, who may have 20, 30 or 40 years until they access their money, could do significantly better by pursuing an equity-based strategy. Over the last ten years a typical balanced pension fund has turned £1,000 into £2,096. A decent return, but significantly less than the £3,435 that same pension investors would have received by choosing a simple global passive fund.
