Beating the FTSE 100

gadgetmind

TBC15 wrote: »

I'm benchmarking on a total return basis

Out of interest, where are you getting your FTSE 100 TR data from?

bowlhead99

dunstonh wrote: »

Its a doddle to beat the FTSE100 assuming you want a 100% equity risk. The FTSE100 does not include payment of dividends. So, picking virtually any UK equity fund would do the trick.

In reality, most people do not have the risk profile to be 100% invested in equities. So, its not really a fair match. The FTSE100 doesnt have a good track record either.

That's a good point, any index you choose as your baseline should of course be the total return version of the index, rather than the one most commonly talked about on TV or in the papers. FTSE's range are published here with daily values.

The official FTSE100 one doesn't go back the full 16 years (only started in 2002), although other groups have calculated unofficial figures for year-as-a-whole if you don't need the daily detail. Alternatively you could look at the TR of a tracker for that period to get a real world return after fees to compare with your own portfolio which is also after fees.

Obviously you can use the FTSE data from their different indexes (and other people, e.g. MSCI or Barclays) to blend together a return that is more of a fair comparison with what types of assets you actually hold. This gets you something more reflective of the return that people are getting when broadly playing in the same types of risks as you.

Of course, if your portfolio started off at 30% UK equity, 50% global equity and 20% bonds, and is still that ratio because you rebalance it from time to time as most people would, you will get a very different result from the return of a simple home-made-index that you get by mashing together different FTSE tables with no rebalancing from day one.

E.g. one total return index (say equities) goes from 1000 to 2000 over ten years and another (say bonds) goes from 5000 to 7000. If you had started off with a 50:50 split between the two types of assets in your 'virtual index', the index would have gone up by 70%, because half the assets went up by 100% and the others went up by 40%. But as you keep rolling forward your virtual index, it is reflecting the return on a portfolio of 59% equities and 41% bonds.

So any 'personalised performance index' that you construct to try to compare with your real world results, should probably be tweaked through annual virtual rebalancing - i.e. build a little spreadsheet model to track what happens if you take the splits back to some fixed ratio of each asset class, after booking each annual return.

This might sound unnecessarily complex. But if you are trying to work out some sensible comparison of what returns you could have got buy buying indexes, it is, necessarily, complex.

Even just looking at your return from a pure UK fund or a self select shares portfolio versus the FTSE all share index, you are playing in the same market but not necessarily the same risk. In the all-share index it tells you what you would have got if you'd made a portfolio that included £1 of Jelf Group and £10 of Beftair and £965 of BP and £1580 of Shell etc.

So, FTSE All-Share is the total return of all the available UK equities market (well, 98% of it, by value), but chances are you do not skew all your holdings quite so much towards the largest companies in the country or on the planet to get a bonkers sector allocation. So, while it is interesting to see if you have beaten or been beaten by the 100 or All-Share or All-World index, it is not necessarily useful.

Something that might be more of use is the average returns of funds in different IMA sectors. The Investment Management Association is a trade body for the funds industry and each fund fits into one of their categories. Using sites like Trustnet you can pull up some graphs of how the average funds in those categories/sectors performed. That might be more useful than seeing whether you 'beat the FTSE' from time to time.

TBC15

gadgetmind wrote: »

Out of interest, where are you getting your FTSE 100 TR data from?

Good point, as I was typing the answer the thought occurred to me “what about dividends”

gadgetmind

Here is some data for the FTSE 100 capital and TR since the 1999 peak.

Dec30 1999, FTSE 100=6930, FTSE 100 TR=3141
Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141
Jun15 2007, FSTE 100=6732, FTSE 100 TR=3851
Oct12 2007, FTSE 100=6730, FTSE 100 TR=3889
Mar3 2009, FTSE 100=3512, FSTE 100 TR=2147
Feb8 2011, FTSE 100=6091, FTSE 100 TR=3987
Sep22 2011, FTSE 100=5041, FTSE 100 TR=3387
Aug17 2012, FTSE 100=5852, FTSE 100 TR=4077
Dec19 2012, FTSE 100=5972, FTSE 100 TR=4198
Feb3 2013, FTSE 100=6347, FTSE 100 TR=4466
Apr10 2013, FTSE 100=6387, FTSE 100 TR=4539
Feb24 2014, FTSE 100-6866, FTSE 100 TR=5029
May9 2014, FTSE 100=6815, FTSE 100 TR=5039

Beating the first number is one thing, but beating the second rather harder. And remember, most investors will be investing across a range of asset classes and territories, and rebalancing, which adds further to their return.

TBC15

gadgetmind wrote: »

Here is some data for the FTSE 100 capital and TR since the 1999 peak.

Dec30 1999, FTSE 100=6930, FTSE 100 TR=3141
Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141
Jun15 2007, FSTE 100=6732, FTSE 100 TR=3851
Oct12 2007, FTSE 100=6730, FTSE 100 TR=3889
Mar3 2009, FTSE 100=3512, FSTE 100 TR=2147
Feb8 2011, FTSE 100=6091, FTSE 100 TR=3987
Sep22 2011, FTSE 100=5041, FTSE 100 TR=3387
Aug17 2012, FTSE 100=5852, FTSE 100 TR=4077
Dec19 2012, FTSE 100=5972, FTSE 100 TR=4198
Feb3 2013, FTSE 100=6347, FTSE 100 TR=4466
Apr10 2013, FTSE 100=6387, FTSE 100 TR=4539
Feb24 2014, FTSE 100-6866, FTSE 100 TR=5029
May9 2014, FTSE 100=6815, FTSE 100 TR=5039

Beating the first number is one thing, but beating the second rather harder. And remember, most investors will be investing across a range of asset classes and territories, and rebalancing, which adds further to their return.

There is some disturbing information coming out.

60% TR over the time period makes me feel like Warren Buffet. I’m obviously not. From the seasoned investors out there what do they regard as an average return worthy of the effort?

Glen_Clark

gadgetmind wrote: »

rebalancing, which adds further to their return.

Wouldn't they have to rebalance just to keep the FTSE 100 as some companies drop out and new companies enter. And rebalancing costs fees.. spreads.. taxes..

Thrugelmir

Glen_Clark wrote: »

Wouldn't they have to rebalance just to keep the FTSE 100 as some companies drop out and new companies enter. And rebalancing costs fees.. spreads.. taxes..

Companies also go bust. Bradford & Bingley along with Northern Rock springs to mind. So if these shares were held losses would ensure regardless. If not the probability of beating the index would be far higher.

gadgetmind

Glen_Clark wrote: »

Wouldn't they have to rebalance just to keep the FTSE 100 as some companies drop out and new companies enter. And rebalancing costs fees.. spreads.. taxes..

That's two questions in one.

1) Yes, FTSE 100 trackers do have to buy new entrants and sell those that drop out, but the market caps of those on the boundary is very small compared to the whole index, so the effect is small. If this worries you, buy an All Share tracker and get a bit of smaller cap exposure into the bargain.
2) Yes, rebalancing between different asset classes and territories does add trading costs, and there are many studies regards the best rebalancing strategies. However, the "sell high, buy low" that rebalancing introduces as different assets bounce around in value *does* increase returns.

Read "The Intelligent Asset Allocator" by William Bernstein and all will be clear.

masonic

TBC15 wrote: »

There is some disturbing information coming out.

60% TR over the time period makes me feel like Warren Buffet. I’m obviously not. From the seasoned investors out there what do they regard as an average return worthy of the effort?

Even people "investing" cash in a savings account with an average interest rate of 3.5% could have comfortably beat the returns of the FTSE100 over that time period. On a global 100% equity portfolio, I'd be expecting average returns of at least 6% per year if held over 15 years: somewhere in the region of 150%. A global tracker fund would have returned less than that between 1999 and 2014, but if you add in some additional exposure to smaller companies and emerging markets then it probably would get up to at least that level of return.

gadgetmind

Yes, that period starts from a market uber-high. Anyone switching all their cash into the markets at that point has had a bad time. The other 99.999% of people have done just fine.