Making money from funds

Thrugelmir

masonic wrote: »

Even the FTSE 250 has quadrupled over the last 15 years (including reinvested dividends), translating to an annualised return of 9.7%.

The FTSE isn't a static group of companies though. When Northern Rock went bust. All investors lost their shirts. While another Company simply replaced NR in the index.

masonic

Thrugelmir wrote: »

The FTSE isn't a static group of companies though. When Northern Rock went bust. All investors lost their shirts. While another Company simply replaced NR in the index.

The impact of their loss would be determined by how diversified their investments were. Those who bet the farm on NR would have lost their shirts, but those invested in an index tracker would have simply replaced it with another underlying company just as the index did. There is of course a whole spectrum in between.

I think it would have been very problematic to pick some individual stocks, or even managed funds, and use them to show investing in equities over the past 15 years yielded good results without accusations of survivorship bias . At least comparing one index with another makes things a little fairer.

Edit: Or was your point that when a company goes bust the loss is not reflected in the value of the index? - If so, really?

TH1878

masonic wrote: »

Yes, that's what happens when you cherry pick an exceptionally good period for the markets in general. During those same 14 years, the FTSE 100 returned about 780% (16.8% annualised). Clearly that period does not represent historical standards.

I started it from the start of the available date on FE Analytics - no cherry picking.

Given that the FTSE 250 was established in 1984 and it is a moot point as to whether the small cap equity premium actually exists,

A moot point with whom? You? I'm aware of the counter arguments but the facts are that between the 1920s and 2014, small caps returned 4% more than the general market.

There may not be a small cap premium and I'm sure there are many counter arguments to the above. However, the facts are the facts and you can't just dismiss it as being irrelevant.

it would seem reasonable to take the historical standard as the long term returns from equities of 5%+inflation

No it's not really reasonable - see above. If you could say with absolute 100% definitive proof then, yes, it would be reasonable.

But you can't.

Hence, good by historical standards.

Good by historical standards compared to the general market, not small and mid-cap - it was around 2% pa down. Apples and Oranges.

The facts are that the FTSE 250 did worse in the last 15 years of its existence than it did in the first.

This is a rather boring argument anyway - I made a flippant remark whilst drunk! We could be here for days with arguments and counter-arguments and, as I'm on holiday, I'm out.

masonic

TH1878 wrote: »

A moot point with whom? You? I'm aware of the counter arguments but the facts are that between the 1920s and 2014, small caps returned 4% more than the general market.

There may not be a small cap premium and I'm sure there are many counter arguments to the above. However, the facts are the facts and you can't just dismiss it as being irrelevant.

I did not dismiss it. I was using the OED definition of moot (debatable), so we seem to be in agreement that the small cap premium may not exist.

No it's not really reasonable - see above. If you could say with absolute 100% definitive proof then, yes, it would be reasonable.

But you can't.

Good by historical standards compared to the general market, not small and mid-cap - it was around 2% pa down. Apples and Oranges.

"Historical standards", to me, means in the general case. If you wanted to define historical standards to mean something different than historical standards for equities in general, you should have been more specific. The fact remains that you cannot define the historical standard for the FTSE 250 because of lack of data, so it is necessary to extrapolate from some other index. Since the FTSE 100 and FTSE 250 had comparable returns over the first 14 years, it certainly does seem reasonable to me to compare them again over the next 15 years.

The facts are that the FTSE 250 did worse in the last 15 years of its existence than it did in the first.

Nobody is disputing that. I am merely disputing that the first 14 years of returns data you used is clearly not representative of historical standards.

This is a rather boring argument anyway - I made a flippant remark whilst drunk! We could be here for days with arguments and counter-arguments and, as I'm on holiday, I'm out.

Sorry to bore you. Perhaps you just need another drink.

TH1878

masonic wrote: »

I did not dismiss it. I was using the OED definition of moot (debatable), so we seem to be in agreement that the small cap premium may not exist.

And simultaneously agreeing that it may exist. :T:T

"Historical standards", to me, means in the general case.

Ok... No problem with that - just remember that point further down this post...

If you wanted to define historical standards to mean something different than historical standards for equities in general, you should have been more specific.

Perhaps....

The fact remains that you cannot define the historical standard for the FTSE 250 because of lack of data, so it is necessary to extrapolate from some other index.

From another index where small caps outperformed larger caps....? Not the 14 years where the FTSE 100 did better?

Since the FTSE 100 and FTSE 250 had comparable returns over the first 14 years, it certainly does seem reasonable to me to compare them again over the next 15 years.

What!? Seriously!? See above.

Surely you can see how that is at odds with your previous statement about not being able to define the historical standard of the FTSE 250.

By your logic, the fact that the FTSE 100 outperformed should be irrelevant because it is not indicative of historical returns.... Or are you changing your definition of historical returns?

Nobody is disputing that. I am merely disputing that the first 14 years of returns data you used is clearly not representative of historical standards.

Again, at odds with your previous statement.... "It's reasonable to compare the FTSE 100 and FTSE 250..." Doesn't make sense.

Sorry to bore you. Perhaps you just need another drink.

I think I do, I can't keep up with the contradictions. :beer::beer::T

Let's leave this here. I'm on holiday, you're getting your knickers in a knot and we're arguing about something that is pretty irrelevant and in no way relevant to the OP.

Chapeau.

masonic

TH1878, I think I've been quite patient with you in explaining my reasoning and have been forthcoming with data to support it. It is you who seems to be getting their "kickers in a knot" and your posts are becoming increasingly hostile.

The fact is you are getting yourself worked up over this when you should be relaxing on holiday. That was not my intention when I proffered the FTSE 250 as a market that did well over the past 15 years by historical standards. I was always happy to continue the discussion and would not reply if I was not. But I will not accept any responsibility for your actions in keeping this discussion going - a discussion requires at least two willing participants.

In answer to your points above:
- As already mentioned, I took "historical standard" to be the general case. However, since you objected to this, I attempted to explain why the general case may be applicable anyway. When a historical standard cannot be determined for an index, such as the FTSE 250, extrapolation from another index is necessary. I compared it with the FTSE 100 and it had comparable returns over the 14 year period you specified, and you were previously happy to use for comparison purposes. Given the returns were similar over those 14 years, it is reasonable to assume no small cap equity premium applied to the FTSE 250 and make use of the longer dataset from the Barclays equity and gilt study (since the FTSE 100 did a little better relative to the FTSE 250, perhaps this would overestimate the historical norm).
- There is no contradiction in not correcting for a small cap premium that is so nebulous that it may not even exist, so I used the Barclays data uncorrected.

The conclusion was, of course, that the returns from the FTSE 250 of 9.7% annualised, or a real return of 6.9%, were good by historical standards. I don't think many people would disagree with that conclusion, despite the necessary shortcomings of the analysis.

masonic

Following on from the conclusion that the FTSE 250 did relatively well at a time when developed large cap indexes suffered, it raises the question why did it do so well if not for the existence of a small cap premium?

Looking at the FTSE 100, it is at the best of times not a very well diversified index. It tends to be dominated by a small number of sectors and those companies that are part of a bubble will tend to rise to the top of the market before the bubble bursts, so it is not suprising that it was particularly affected by the dotcom bubble bursting, the financial crisis, and more recently the crisis in commodities. Performance has been overshadowed by those events, meanwhile the FTSE 250 has been relatively less affected because of its greater diversification.

However, I don't think that is evidence for a small cap premium. A more diversified basket of large cap stocks would also have done relatively well. Those same stocks would have underperformed the FTSE 100 during the earlier period when the bubble was forming (just as the FTSE250 underperformed the FTSE100). So, I would suggest that the relative overperformance of the FTSE250 during this recent period of multiple bear markets can be explained for reasons other than just its size.