How is your portfolio doing? Well, that’s an interesting question and I suppose it to a large extent depends on what an individual is expecting to achieve in term of return.
If we look at a base zero risk, well almost zero risk, an option we could put our money in a bank or building society with little interest return that is steadily eroded by tax if outside of a tax wrapper, cash ISA for example. Also within a tax wrapper or without that enemy at the gate called inflation continually eroding the true worth of our capital. The risk is low and you probably get to sleep very well at night. For those with a need for a little extra spice, there is the premium bonds option that delivers a tad over 1% for the average punter and can be just about ok for 40% rate tax payers. You also have the chance of winning a million £ but you probably in reality have a greater chance of living to be 110 or Michelle Keegan asking you out to dinner; stop dreaming, it ain’t going to happen!
So we investors are always looking to beat the simple safe return and after all we want something extra back for our increased risk. For example, an income portfolio holder may want basic bank/BS return plus let’s say 3% and be comfortable if on average they achieve 4-5% return with hopefully some acceptance of risk to capital. Of course, there are many variations on such a theme and each satisfies the goal needs of an individual balanced against lifestyle risk.
Personally for a good number of years I used to have a target of simply beating the FTSE or similar based on total return. That’s all well and good, but one gets a rather hollow feeling congratulating oneself when you have beaten such an index by let’s say 3% in a falling market i.e. “I have lost money, but I tell you what, it could have been much worse”. These days I like to think that the objective of my investments is to actually make my pot of dosh grow; well if not every year at least averaged over say three years.
I could simply play nice and easy and aim to beat the FTSE all share total return (ASX.TR) and, to be honest, that’s my first base camp up the mountain. Now thinking about it as I have tools at my disposal such as Sharescope/Sharepad, Stockopedia and Sharelockholmes, the odds are that I should be capable of sieving or whittling away the couple of thousand stocks on the LSE and producing some nuggets with a fighting chance of beating the ASX.TR. After all, this index contains the gems, the nuggets and all of the dross. As you can see I am totally setting myself up to take a fall, silly me but that’s life! If I regularly can’t beat such an index then should I pack up, invest in an index tracker or two and go fishing or do something else that amuses me?
However, let’s make it a little harder on ourselves and why not? Let’s try to climb up that mountain a fair bit higher than the base camp and measure our performance against much tougher opposition. A chap who I have a great deal of time for is Terry Smith a guy who put his career in danger when he wrote the book accounting for growth: Terry Smith now runs Fundsmith. Fundsmith is a rather special investment vehicle under Terry’s stewardship it seeks to invest in a very limited number of companies that have a high ROCE, have something of a moat, good certainty of growth and are resistant to change. The companies involved are big and household names: Domino’s, Imperial Tobacco, Unilever, eBay, Reckitt Benckiser to name a few. If you invested £10,000 in the fund at inception on 1/11/2010 then that £10,000 would at the time of writing be worth £22,000. This compares to £13,300 invested in the FTSE 100 TR (I don’t have a figure for ASX.TR going back to 1/10/2010). So, Terry Smith, that’s impressive, well done. If I can’t beat Terry then again should I simply pack up and let him look after my dosh? Interesting one that and to be perfectly honest the good Terry Smith does manage 10% of my wealth in Fundsmith Equity T Acc. Now although I am happy with what Terry is doing for me I want to beat his performance, so we now have two targets:
The FTSE All Share TR/ FTSE 100 TR
Fundsmith Equity T Acc.
Now that is tough but let’s be really a bit tougher and move further up the investment mountain challenge and compare performance against the splendid Marlborough Special Situations UT and the brilliant Henderson Smaller Companies IT.
So without whittling on forever, just how do all these compare if we use the start date as 1/11/2010, the start date for Fundsmith, and invest £10,000 in each of the four vehicles:
FTSE 100 TR £10,000 becomes £13,300
Fundsmith T Acc: £ 10,000 becomes £22,000
Marlborough Special Situations £10,000 becomes £22,000 (yes same as Fundsmith)
Henderson Smaller Companies £10,000 becomes £24,500
Now that all looks interesting and again I ask the question “if I can beat Marlborough or Henderson, then why not let them look after my dosh”? Well being honest once again, I do let them look after about 4% of my capital.
However, let’s get back to the bigger picture and look at the last 10 years. You know the time that encompassed the great global financial melt-down, the banking crisis. Incidentally, I was spending some time on the Greek Island of Lesbos as the melt-down was unfolding; I thought what do we have here RBS at absolute bargain price, I will have some more of that: well that’s another story!
How does the 10-year picture look for the FTSE 100 TR, Marlborough Special Situations UT and Henderson Smaller companies IT? Well here we are what would £10,000 invested in each on 01/11/2005 be worth today right through the banking crisis warts and all:
FTSE 100 TR: £16,900
I can’t give figures for Fundsmith as they were not about 10 years ago.
In summary in order to beat very high-quality investment vehicles: the likes of Fundsmith, Marlborpugh Special Situations. Henderson Smaller Companies; we need to make a return of over 13-14% over the long term and that’s taking into account another dreadful slump such as the banking crisis. Outside of crisis time i.e. the last five years where we have had eurozone crisis, oil price collapse, and generally business as usual our target return should be in the area of over 17% to 19% in my opinion just to make all the hard work worthwhile. If you can’t beat these guys who after all have a splendid sustained track record, then why bother to invest yourself with your own preferred approach which includes lot’s of hard work and I have to say anxiety, pain, elation and hopefully fun. As it happens they collectively look after about 14% of my portfolio and with the other 86% my target is to do better but it is really not that easy.
The measures I use to give me a view on how I am actually doing are thus my performance against:
FTSE All Share TR: epic : ASX.TR
Fundsmith Equity T Acc: epic: FUEQUI: manager Terry Smith
Marlborough Special Situations: epic: FMCIAL: manager Giles Hargraves
Henderson Smaller Companies IT: epic: HSL: manager Neil Hermon
Overall to beat this lot it’s not an easy target but it does focus the mind and hopefully bring added discipline to ones investment decisions. Each of the three UT/ITs above are truly class acts run by very highly respected managers. It is certainly a lot tougher than the soft measure of simply aiming to beat the FTSE or FTSE ASX.TR
I hope you found this article a little thought provoking; happy investing!
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.