10-Year Performance Figures: Handle With Care

There has been no shortage of articles marking the 10th anniversary of the financial crash in recent weeks. This isn’t another one you’ll be pleased to hear. Well, perhaps just tangentially.

Many of us are well aware of the regulatory warning that “past performance is no guide to the future”. Of course, there is a lot of truth in this. Managers change, investing styles go in and out of fashion, and so on.

But I’m certainly guilty of considering past performance when choosing funds. Personally, I like to see a mixture of both good overall performance and consistency over time. Slow and steady wins the race you might say.

The 10-year performance miracle

Looking at the AIC statistics area as of the end of September 2018, the 10-year net asset value return of the entire investment trust industry was 229%. That’s on a market-cap weighted basis and including dividends. In other words, asset values have more than trebled.

September 2008, when these comparisons start, was the depth of the financial crisis. So, it shouldn’t be a surprise to see returns have been so high.

And with the low point of the UK market not being reached until March 2009, it will be some time before 10-year performance figures will begin with what we can call a more ‘normal’ starting point.

In share-price terms, the picture is even rosier at 274%. That’s a near quadruple. Discounts widened significantly as we headed into the financial crisis and have since narrowed considerably to record lows.

Standout sectors

Certain sectors did particularly well. Global comes in at 361% in share price terms, boosted by the fine performances of funds such as Lindsell Train and Scottish Mortgage. Funds heavily invested in the US market, which has roared ahead, have led the way.

Smaller companies have done superbly, with the UK sub-sector returning 423% and the three-fund strong Japanese smaller company cohort chiming in with an incredible 675%.

Survivor series

Looking down the performance tables, it’s clear there is a lot of survivorship bias at work, too. In other words, poorly performing funds tend to get closed down or merged with others. They drop out of the figures, raising the average performance of the funds that remain.

Somewhere in the region of 40% of currently listed funds don’t yet have a 10-year track record. None on these are therefore included in those performance figures I quoted.

I must admit I was a little surprised when I discovered that 40% figure. But then we have seen an explosion of new funds targeting alternative assets like debt, infrastructure and renewables.

While poorly performing open-ended funds tend to linger around like a bad smell, struggling investment trusts don’t tend to last as long, and disappear from the figures as a result.

What to expect next

It probably goes without saying, but we shouldn’t expect the next 10 years to be anything like as good.

The long-term average for global equity markets, going back over a century, is some 5% a year on top of inflation. So, in nominal terms without taking inflation into account, it’s probably in the region of 8% a year.

In annualised terms, the average investment trust has returned 14% over the last 10 years.

I don’t believe that you can predict where the markets will head next, but if you’re assuming a certain rate of return for your retirement investments, erring on the side of caution certainly makes sense.


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