A couple of questions we often get asked by clients are:
‘How do my returns compare to others?’, and
‘What are the average returns earned by people like me?’.
How have Stockspot clients performed?
Here’s the range of actual annualised returns earned by Stockspot clients in our Topaz portfolio since we started to the end of 2019.
(to see other portfolios scroll down)
Over 70% of clients have earned 10% per year or more with us.
How does Stockspot calculate returns?
You might notice that these figures are different to the return figures we publish in our newsletter each month. The returns we publish in our newsletter are time weighted returns since inception.
Time weighted returns are the most common return figure published by investment options. Unfortunately they don’t really help you understand what a typical client has earned.
Here’s why: time weighted returns assume you invested everything on the day we launched and haven’t done anything since. That almost never happens which is a big weakness in using time weighted returns to represent how investors have done.
These are our time weighted returns after fees since we launched in 2014:
|Time weighted |
Time weighted annualised return after ETF and management fees as at 31 December 2019
As you can imagine – most of our clients didn’t invest with Stockspot when we opened our doors in 2014 and many have invested more than their initial deposit or taken money out.
These factors all impact the actual returns our clients have earned. This is why we show each client their money weighted annualised return in the dashboard once they have invested for a year.
Your money weighted return is personalised to you and takes into account the timing and size of your deposits and any withdrawals. This is the actual annualised return you’ve received – in the end that’s all that matters to you!
Why money weighted returns matter
We don’t control when our clients invest or withdraw. This is why money weighted returns vary from client to client. However part of our job as an investment adviser is to help clients stick to smart investing habits to improve their chances of success.
That includes not panicking when markets fall, using market dips as an opportunity to buy, and avoiding the dangerous temptations markets present every day including chasing the latest investing fad, not diversifying enough and trying to time the market.
Money weighted returns matter to us because it’s the figure that matters most to clients.
We crunched the numbers and found the money weighted returns our clients earned have been higher than the time weighted returns we publish. And not by an insignificant amount either – across all portfolios clients have done 1.76% p.a. better than the time weighted returns.
These are our average money weighted annualised returns for all active clients:
|Average money weighted annualised return since inception (p.a.)||Difference vs time weighted return (p.a.)|
Money weighted annualised return after ETF and management fees as at 31 December 2019
Why active fund managers avoid showing money weighted returns
Your money weighted return is what you actually earned. It’s the most important figure to measure your investment results, so it’s good news Stockspot clients typically do better than the time weighted figures we publish.
Why don’t more fund managers publish this?
I’ll let you in on a little secret….. the average returns earned by investors in most active funds tend to be much lower than their published returns.
This is why:
1) Active investors chase returns
Investors in active funds tend to chase returns, they gravitate to funds that performed well in the recent past. Those same funds are usually the next period’s worst performers and this cycle repeats.
Morningstar showed this in some research: funds with a 5 star ratings (usually the best performers from last period), tend to be the worst performers in the next period and vice versa.
Another famous example is the Fidelity portfolio manager Peter Lynch, considered by many to be the greatest fund manager of all-time. During his time as an active fund manager Lynch beat the market generating a 29% p.a. return.
However Lynch calculated that the average investor in his fund only made 7% p.a. during the same period. Why? When his fund had a period of not doing well, money would leave. Then when he started doing well again money would flow back in, missing the bounce.
This is known as the behaviour gap because the weight of money often enters and leaves active funds at the wrong time.
2) Active fund managers do better before you’ve heard of them
Most large active funds have their best performance in their early years when they’re not managing much money and before anyone has heard of them.
Those that don’t perform well early disappear (this is known as survivorship bias) and those that do well early attract more funds.
As active funds attract more money their relative returns fall because there are ‘capacity constraints’.
This is the technical way of saying that a strategy that worked well with $10 million dollars usually doesn’t work as well with $100 million or $1 billion because there is no longer the space to invest in the same opportunities.
Any ‘edge’ that a fund manager has tends to disappear when they try to invest more money. But fund managers are always happy to take more money because they can earn higher fees!
Why sensible index investing works
The good news is index investors aren’t as exposed to these problems which harm active investor returns. With index funds there isn’t the same capacity constraints since broad markets are large and deep.
There also isn’t the same level of return chasing that Peter Lynch’s investors exhibited. With good advice and behavioural coaching index investors tend to stay the course because index funds simply deliver the market return.
Just a couple more reasons why investors in index funds do better than those in active funds.