Monday, 3 September 2018
UK v US Investment Returns
Whilst reading back my previous post on the amazing bull run in the US equity market, I was struck by the underperformance of the UK market by comparison.
Not so long back, much of my investments were made up of a mixture of individual shares and investment trusts focussed on the UK market. I was looking for natural income from these investments and the FTSE 100 offered a yield of around 4% compared to the yield of only 2% from the likes of the US market in the form of the S&P 500.
Whilst it has been reassuring to collect this income plus a little additional capital growth, I came to the conclusion in 2015 that my focus on natural income may have been a little short-sighted as more globally diverse options were often overlooked as they did not provide my required level of income.
In 2015, I reviewed my strategy and decided to wind down my UK-listed individual shares in favour of globally diverse low cost index funds such as Vanguard Lifestrategy. This also included moving away from a reliance on natural income and a shift to taking my 'income' from the total return generated by these global funds.
Luckily this moved has worked out well due to the fact that global funds are priced in USD and the fall in the value of sterling post the Brexit referendum in June 2016 has boosted the returns on my index funds.
Global v UK Returns
Since March 2009, the US market has delivered a total return in excess of 400%. From a closing low of 677 it has risen to (currently) 2,900 and if we factor in dividends this gives an average total return of 17% p.a.
Unfortunately, the UK market has failed to keep pace and over the same period the FTSE 100 has risen just 190% on a total return basis. Yes the UK dividend yield has been much higher at ~4% compared to 2% in the US, but from a low of 3,750 in March 2009, the FTSE has risen to (currently) 7,500 or 100%.
I would surmise the difference is largely due to tech stocks. The US markets are home to the likes of Google, Apple, Amazon and Netflix which have delivered outstanding returns over the past decade. Tech accounts for 25% of the S&P. In contrast our markets are dominated by the struggling financial services (20%) and energy companies (18%) whilst tech companies account for less than 1% of our market.
Income in Retirement
I guess many investors will look to investment trusts or income funds to provide their steady 4% or 5% income. When I started my early retirement journey back in 2008, the bulk of my investments were a mix of UK higher yielding shares and ITs. I thought it made sense to try to preserve what capital I had accumulated and from that, maximise the income I could generate.
Looking back however, this was possibly not the best strategy. Hindsight of course is a wonderful thing but the lure of tempting natural yields should not mean the focus of total return is compromised.
A total return of 10% per annum over a decade providing a natural income of just 1% or 2% will always be far superior to a return of 7% which includes a yield of 4%.
The UK market has not offered the best returns for investors over the past decade. This may change as reversion to mean cannot be discounted over the longer period however, until the full saga of Brexit is played out - I am thinking probably at least 10 more years - we will likely continue to face headwinds.
The UK market makes up around 6% of the global market and the top 10 companies account for ~35% of the FTSE 100 index. A globally diverse index fund gives access to over 2,500 companies spread over 50 countries.
I think it makes sense to maintain my globally diverse portfolio. We do not know which areas of the global market will deliver the performance over the coming decade or two. My expectation is for more modest returns compared to the past 10 years. Maybe the UK will recover, maybe not...will the US tech companies continue to deliver or will the growth be delivered by the fast-growing China? Who knows...
Nobody can know when the US bull run will end so for me it's about managing risk which involves maintaining a sensible asset allocation in line with my desire for optimising gains matched with my need for minimising volatility during the next downturn.
Accepting that nothing is certain, the probability of higher returns from my globally diverse equity exposure means I can hold a higher proportion of lower volatility bonds to achieve the same outcome.
Feel free to leave a comment below. What proportion of UK exposure do you hold compared to global? Do you think the US market is over-valued now?