2017 Q4 review: top trumps?Posted: 2018-01-16
It’s the end of the final quarter. More importantly for me, it’s also the end of the fifth year of my portfolio tracking. In the world of asset management, once your track record has five years you are getting on the map. So how are we looking?
How was December?
Well, starting with December, what happened? Equities had a good month – particularly the UK where FTSE-100 rallied in the closing days with a fine Santa Rally. There wasn’t much to report on forex or bonds. In constant currencies, the markets I’m in rose by 2.85%; currencies then added a 0.2% tailwind, so the blended market average for my portfolio was a gain of 3.0%. A good month to be in the markets.
Against a market gain of 3%, December looks actually quite disappointing for me. My portfolio rose ‘only’ 1.7%. Why the lag? I’m not sure; it may be a clerical error because it was all in one of my accounts, but I haven’t had a chance to drill into it. I’m still not complaining about a monthly gain of 1.7%.
How was the full year?
Looking at the wider market during 2017, it has been a very good year for investors.
I won’t do the full analysis here, but there are four things which strike me particularly.
- First of all, in the USA, the S&P’s monthly Sharpe Ratio (simplistically, assuming a risk-free rate of zero, and ignoring dividends) is over 4 (and the Sharpe of the daily returns is 3.2). I am a long-standing fan of the Sharpe Ratio as a measure of your actual return, normalised for risk. In general a Sharpe of over 1 is respectable. A Sharpe of over 2 is what all the professionals claim, but rarely deliver in practice. A monthly Sharpe of over 4 for the world’s major equity index is as close to a one-way bet as I’ve ever seen in almost any asset class. Beating that via active investments is practically impossible. For context, the S&P’s five year simple monthly Sharpe is 1.4, still a fairly respectable performance.
- Secondly, with the dollar falling anything measured in dollars looks pretty chunky. Even FTSE delivered over 20%, in USD. For Brits with home bias, measuring things in pounds, it doesn’t look quite so rosy.
- Thirdly, unequivocably 2017 was the year to be in equities. Take a look at the performance by asset class by year since 2013 – the top four performers were equities in the four geographies that I track. The last time this happened was in 2013.
- Finally, amidst the generally rising tides, three water levels rose particularly strongly: emerging markets, tech and small-caps. I say this slightly defensively, as I am probably underweight on all three. To give two examples, plucked randomly: the Hong Kong index was up about 30%, and the FTSE-250 grew twice as fast as the FTSE-100. This was a good year to be a stock picker, overseas.
So, cutting to the chase, 2017 saw my portfolio grow (on a unitised basis, i.e. ignoring deposits/withdrawals) by 13%. About a percent a month. This isn’t going to set any records – especially compared to US investors with a globally diversified portfolio – but in a world where inflation is around 3% this is still a decent return.
For comparison, FTSE-100 delivered around 13%. So my total portfolio, which blends equities and bonds, returned about the same as an all-equity FTSE-100 tracker. That will do me.
How about the longer term?
I started monthly tracking at the beginning of 2013. Every month I’ve unitised my holdings and tracked my investment portfolio, in one consistent way. And now the picture is beginning to emerge.
It turns out my 1, 3 and 5 year track records all land on the same number. 13%. A lucky number, for me at least.
13% is a very abstract number, but it’s worth considering two points:
- Under the rule of doubling, 13% per year will double every 72/13 = 5.5 years. So in theory I am six months away from reaching 100% return on my starting point on 1/1/13.
- Secondly, the average inflation during the last five years has been under 3%. So my real return – above inflation – is around 10% per year. On this basis my investment portfolio is doubling, after inflation, every 7 years. Assuming I have another 42 years to live, and ignoring withdrawals and taxes, if I kept this up my portfolio would double six more times, i.e. it would increase it 64-fold. I.e. Each £1m of my portfolio would become £64m, in today’s money. This isn’t going to happen. But, crikey, a man can dream….
But the acid test is how does 13% p.a. compare to the market growth over this time period? For me the market benchmark is the currency-weighted market-weighted average of the indices in the markets I am exposed to. I make the five year growth of this benchmark +74%. And my own performance is +84%. So a slight outperformance versus the market, after fees and before taxes. That’s beaten most of the professionals. Glad I’m not using them!