Working out the under/over valued ETF or index fund

ACCA

Hello dear MSE community - reaching out to you to clear up my confusion, highly appreciate your thoughts. 

Background: I am a loyal client of Vanguard and have been sacrificing the salary into SIPP for quite some time, but given the recent market developments I started considering to top up my SIPP in the dip. I've played a couple of simple comps to work out what level of the 'dip' I'd be comfortable to throw a lump-sum in.

Inputs: for simplicity purposes we are going to look at ESG Developed World All Cap Equity Index Fund (UK), but I also created other models in excel for various funds that interest me eg LifeStrategy 100 and FTSE Global All Cap Index. At the moment (11 May 2022 close) the price was £119.82. Fund established on 9 Jun 2020, so for the simplicity purposes I say it's 2 years since initiation, although appreciate it's not full 24 months.

Computation 1: i am trying to work out the compound annual growth ('CAGR') rate per year based on price. Current price is £119.82 and at initiation £100.00, two years horizon i get: [(119.82 / 100.00) ^ 1 / 2] - 1 x 100 = 9.46% per annum average growth.

Computation 2: same exercise as above, but based on the example that Vanguard is giving in the factsheet - 'Past performance based on a lump sum investment'. There is a graph and it infers that if you invested £10,000 on 9 June 2020 (at initiation) today this would be worth £12,457.11. Applying the same formula for CAGR i get: [(12,457.11 / 10,000) ^ 1/2] - 1 x 100 = 11.61%

Questions:

(a) Howcome I get different CAGRs for the same index fund?

(b) What am I missing in my computations? (perhaps reinvested dividends? as it's an accumulation fund)

(c) What would be the right measure to chose? Based on the above measures, I'd wouldn't buy if the CAGR is above 9.5% (just my emotional threshold), meaning I'd top-up my SIPP.

Linton

What was the date of the fact sheet?

If you look on the at https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-uk-gbp-acc/overview and hold the mouse over the end of the graph you will see that £12457.11 was the value in April 2022.  Prices have fallen a lot recently.

The current price on the 13th May was £123.62

Notepad_Phil

ACCA said:

...Computation 2: same exercise as above, but based on the example that Vanguard is giving in the factsheet - 'Past performance based on a lump sum investment'. There is a graph and it infers that if you invested £10,000 on 9 June 2020 (at initiation) today this would be worth £12,457.11. Applying the same formula for CAGR i get: [(12,457.11 / 10,000) ^ 1/2] - 1 x 100 = 11.61%...

I'm not a user of vanguard but eventually found what I think you're using for Past Performance, so if the document I'm looking at is the one you've looked at then it says "As at date 30 Apr 2022" so you're not comparing the same periods.

ACCA

Linton said:

What was the date of the fact sheet?

If you look on the at https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-uk-gbp-acc/overview and hold the mouse over the end of the graph you will see that £12457.11 was the value in April 2022.  Prices have fallen a lot recently.

The current price on the 13th May was £123.62

You're right, I've ran my comps on the 12th May based on the 11th May close. And you're also right to point that £12,457.11 is the performance as of 'end of April 2022'. 

I admit the periods that I try to compare not exactly matching, but from conceptual perspective - are the maths okay? What is causing the disparity between the price and performance CAGR?

Linton

ACCA said:

Linton said:

What was the date of the fact sheet?

If you look on the at https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-uk-gbp-acc/overview and hold the mouse over the end of the graph you will see that £12457.11 was the value in April 2022.  Prices have fallen a lot recently.

The current price on the 13th May was £123.62

You're right, I've ran my comps on the 12th May based on the 11th May close. And you're also right to point that £12,457.11 is the performance as of 'end of April 2022'. 

I admit the periods that I try to compare not exactly matching, but from conceptual perspective - are the maths okay? What is causing the disparity between the price and performance CAGR?

The maths is right.  The problem is that thanks to volatility a few days change in the period being calculated can make a larger difference than the sort of effects you seem to be looking for.  Funds dont have a consistent CAGR except perhaps over the long term, not a couple of years.  And even then that's history.  The future may be different.

ACCA

Notepad_Phil said:

ACCA said:

...Computation 2: same exercise as above, but based on the example that Vanguard is giving in the factsheet - 'Past performance based on a lump sum investment'. There is a graph and it infers that if you invested £10,000 on 9 June 2020 (at initiation) today this would be worth £12,457.11. Applying the same formula for CAGR i get: [(12,457.11 / 10,000) ^ 1/2] - 1 x 100 = 11.61%...

I'm not a user of vanguard but eventually found what I think you're using for Past Performance, so if the document I'm looking at is the one you've looked at then it says "As at date 30 Apr 2022" so you're not comparing the same periods.

That's a good and right spot. That would mean that i'd need to amend the 'power' in my comps from 1/2 to 12/22 if converted into months, but generally that would not have a huge impact on my numbers, I've just re-ran the comps in my model.

ACCA

Linton said:

ACCA said:

Linton said:

What was the date of the fact sheet?

If you look on the at https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-uk-gbp-acc/overview and hold the mouse over the end of the graph you will see that £12457.11 was the value in April 2022.  Prices have fallen a lot recently.

The current price on the 13th May was £123.62

You're right, I've ran my comps on the 12th May based on the 11th May close. And you're also right to point that £12,457.11 is the performance as of 'end of April 2022'. 

I admit the periods that I try to compare not exactly matching, but from conceptual perspective - are the maths okay? What is causing the disparity between the price and performance CAGR?

The maths is right.  The problem is that thanks to volatility a few days change in the period being calculated can make a larger difference than the sort of effects you seem to be looking for.  Funds dont have a consistent CAGR except perhaps over the long term, not a couple of years.  And even then that's history.  The future may be different.

Thanks, and I do agree with your notes.

Let me ask your view on LifeStrategy 100 fund which is over 10 years old. I've just computed the CAGR for my indicative purposes over the entire period of life of the fund trying to smoothen the volatility. Would you consider my judgement correct if I said that if the current price of the a unit is below a certain %-ge of implied CAGR - then it's a buy opportunity? My personal comfortable CAGR for S&P would be anything below 9% and if we speak of UK then I'd be comfortable buying if today's price would be below the 5% threshold of CAGR over time. Perhaps a blended rate of 7% would be applicable for LifeStrategy 100 given the geographies split between North America and the UK.. I might have got the %ges wrong given I am averaging the average, but just trying to confirm the way of thinking with others to ensure i'm not missing smth super obvious. 

Thrugelmir

You'd obtain an equally accurate forecast of future market returns by consulting runes. 

Linton

In my view you would be incorrect to judge VLS100 against any predetermined CAGR .  tbh I cannot see how a fund owning shares in thousands of companies world-wide can be a buying opportunity.  Its price simply represents an average of most large companies in the world.

The next problem is the timeframe.  If you measure over a long  time period the results will reflect what happened 10 years ago as much as they do recent events. 

My final point is that there seems to be a belief amongst new investors that funds perform well or badly, and that an investor should seek out those that will do well and to discard those that have gone "off the boil".  

The truth is that most funds simply perform according to what they invest in.  And what they invest in is mostly determined by the fund's remit together with the house style - see Baillie Gifford for a good example.  The behaviour of the underlying investments as a whole is mainly determined by global economics and social factors.  For most funds the skills of the individual manager make little difference.

 So what does one do (IMHO)...
It can make sense to look at the history of fund returns.  But what one gets from it is insight, not sell and buy signals.  If a fund seems to be doing badly compareed with its peers look at the underlying investments  and work out why. Morningstar or Trustnet can provide data on this.

I choose my investments primarily on what they invest in with the objective of creating and maintaining a portfolio that holds enough but not too much of every different characteristic  the underlying investments could have - eg size, country, industry,  maturity etc etc.  The let events take their course.

These comments just apply to OEIC/UTs.  ITs are more like individual companies and perhaps at times could provide buying opportunities based on the premium/discount, but that needs to be assessed alongside other factors.

ACCA

Linton said:

In my view you would be incorrect to judge VLS100 against any predetermined CAGR .  tbh I cannot see how a fund owning shares in thousands of companies world-wide can be a buying opportunity.  Its price simply represents an average of most large companies in the world.

The next problem is the timeframe.  If you measure over a long  time period the results will reflect what happened 10 years ago as much as they do recent events. 

My final point is that there seems to be a belief amongst new investors that funds perform well or badly, and that an investor should seek out those that will do well and to discard those that have gone "off the boil".  

The truth is that most funds simply perform according to what they invest in.  And what they invest in is mostly determined by the fund's remit together with the house style - see Baillie Gifford for a good example.  The behaviour of the underlying investments as a whole is mainly determined by global economics and social factors.  For most funds the skills of the individual manager make little difference.

 So what does one do (IMHO)...
It can make sense to look at the history of fund returns.  But what one gets from it is insight, not sell and buy signals.  If a fund seems to be doing badly compareed with its peers look at the underlying investments  and work out why. Morningstar or Trustnet can provide data on this.

I choose my investments primarily on what they invest in with the objective of creating and maintaining a portfolio that holds enough but not too much of every different characteristic  the underlying investments could have - eg size, country, industry,  maturity etc etc.  The let events take their course.

These comments just apply to OEIC/UTs.  ITs are more like individual companies and perhaps at times could provide buying opportunities based on the premium/discount, but that needs to be assessed alongside other factors.

Thanks for a detailed note, quite a bit of things for me to digest and obviously investigate further. Apparently that's the destiny of a newbie investor