Don’t under estimate the value of more certain returns

Since the turn of the Century investment returns have become much more difficult to come by.

In May last year I noted of the 20,000 plus funds available to UK investors only 10% had delivered 8% per year as an average return over 5 years. After a bruising year for many equity funds that number has now dropped to 4.5%. 

The average 60/40 mixed asset equity bond fund has returned just 7.7% in 5 years equivalent to a compound return of just over 1% p.a. and less than a decent deposit account.

Taking on more risk has also been failing to deliver what you might call premium returns. Whilst many funds can show great returns for short periods, longer term returns are definitely lower across the board. I was struck by a note last week on a top performing UK smaller companies investment trust. This higher risk fund had consistently outperformed the UK smaller companies index but over 10 years had still only delivered 7.3% p.a.  And when I say higher risk, you need a firm stomach to own a fund like this, it fell 26% in the second half of 2011.

At the route of this is the lack of long term returns coming from broad equity market indices, which much of the fund market replicates.  The statistics are startling. In the 80’s the US Dow Jones index rose from 780 to 2,750 a return of 250%, in the 90’s it went to 11,500 a return of 320%, in the 12 years since 2000 it has grown just 11% to 12,800 today, less than 1% a year. In the UK the 21^st Century has yet to see the FTSE 100 beat its 1999 high of just shy of 7,000.

This month we are launching our first Managed Bond Account in association with Selftrade which will generate an initial target income yield after fees of 7% p.a. from a portfolio of 8-10 corporate bonds from household companies, with some potential for capital gains as they will on average be bought below their par redemption prices.  This is a simple and attractive alternative to buying funds with a high degree of transparency and certainty around the process, the costs, the income generated and the likely capital position over time.

www.managedbondaccount.com

Always remember the value of investments and the income they produce can fall as well as rise. Past performance is no guarantee of future returns.

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