Five years on from that vote and many things have happened – or not happened – and many of those things have no connection to that vote. We’ve had an economy in lockdown for fifteen months, together with additional government spending and continuing low interest rates. We may be about to emerge from lockdown and markets have, I think, anticipated much of that.
I chose five years ago to ignore the noise that emerged after that vote and continued with my existing income growth approach with high UK exposure and some Asia Pacific and global exposure too. During the five years I did build up investments in UK high yield bond trusts, and UK high yield commercial property REIT’s, in order to increase my portfolio income. Later on, I increased my Asia Pacific and global equity holdings and reduced my UK equity holdings. I managed to also ignore the noise around the lockdown of the economy last year and stay invested and on my chosen path. Now I am very slowly switching from equity income holdings to small company growth holdings whilst keeping my income at around the current level.
I thought it would be an interesting time period to review. My key performance indicators in this five-year review are capital, investment income versus household expenditure, and total return. My key comparisons are with a UK equity index, a UK tracker fund, and a UK inflation index,
Capital
My capital has increased by 44.62% as shown in this table and graph.
| Capital | Inherited | Capital Growth | Investment Income | Expenditure | |
|---|---|---|---|---|---|
| 31-May-16 | 100.00 | ||||
| 31-Dec-16 | 111.66 | 0.00 | 11.92 | 2.14 | -2.40 |
| 31-Dec-17 | 122.56 | 0.00 | 10.14 | 4.84 | -4.07 |
| 31-Dec-18 | 110.63 | 0.00 | -12.88 | 5.11 | -4.17 |
| 31-Dec-19 | 128.19 | 0.00 | 16.33 | 5.62 | -4.39 |
| 31-Dec-20 | 132.74 | 14.57 | -12.62 | 6.70 | -4.10 |
| 31-May-21 | 144.62 | 0.00 | 9.98 | 3.55 | -1.65 |
| 14.57 | 22.88 | 27.96 | -20.79 |
[as % of May 2016 assets]
This increase is 30.05%, if the inheritance is deducted. That is higher than the 17.10% increase in the FTSE UK All Share capital return index, and higher than the 15.19% increase in RPI inflation.
Income versus Expenditure
Expenditure as a percentage of investment income, as taken from the above table, gives these results.
| Spend % | |
|---|---|
| 31-Dec-16 | -112.39 |
| 31-Dec-17 | -84.14 |
| 31-Dec-18 | -81.54 |
| 31-Dec-19 | -78.10 |
| 31-Dec-20 | -61.24 |
| 31-May-21 | -46.55 |
| 5 years | -74.35 |
Overall spending was 74.35% of investment income over the five years. 2016 and 2021 are part years, seven months and five months respectively, so they produce unusual spend percentages because my income and expenditure don’t fall evenly across the year. The overall trend is for the spend percentage to fall from over 85% to about 60%, mainly because of increasing income and stable spending.
Total return
My total return measure starts at 100.00 on 31 December 2013 and uses a chain of annual or part year calculated total return percentages. Total returns between that start date and 31 May 2016 were a disappointing 3.60%.
[Total Return = (ending balance – ½ contributions + ½ withdrawals) divided by (beginning balance + ½ contribution – ½ withdrawals) minus 1 ]
| Total Return | Index | Tracker | RPI | |
|---|---|---|---|---|
| 31-May-16 | 103.60 | 5,580.19 | 106.48 | 262.1 |
| 31-Dec-16 | 118.24 | 6,424.25 | 121.55 | 267.1 |
| 31-Dec-17 | 134.39 | 7,265.66 | 137.11 | 278.1 |
| 31-Dec-18 | 125.72 | 6,577.39 | 124.84 | 285.6 |
| 31-Dec-19 | 151.17 | 7,837.96 | 147.65 | 291.9 |
| 31-Dec-20 | 144.46 | 7,068.59 | 133.01 | 295.4 |
| 31-May-21 | 159.28 | 7,840.17 | 147.16 | 301.9 |
For comparison purposes my chosen equity index is the FTSE All Share total return index. After five years the FTSE UK All Share total return index has increased by 40.50%. A typical unit trust tracker fund (M&G Index Tracker Fund Sterling A Acc) attempting to track the index had a total return of 38.20%. This is lower because of fees and tracking errors. My chosen inflation index is the retail price index. Between May 2016 and May 2021, the RPI index has increased by 15.19%.
I calculate that my portfolio total return has been 53.74%. That is a compound annual growth rate of 8.98%. This exceeds the returns from both the FTSE All Share total return index and from the M&G Index Tracker Fund Sterling A Acc, and exceeds RPI inflation.
| Total Return % | Index % | Tracker % | RPI % | ||
|---|---|---|---|---|---|
| 31-May-16 | |||||
| 31-Dec-16 | 14.13 | 15.13 | 14.15 | 1.91 | 7 months |
| 31-Dec-17 | 13.66 | 13.10 | 12.80 | 4.12 | |
| 31-Dec-18 | -6.45 | -9.47 | -8.95 | 2.70 | |
| 31-Dec-19 | 20.24 | 19.17 | 18.27 | 2.21 | |
| 31-Dec-20 | -4.44 | -9.82 | -9.92 | 1.20 | |
| 31-May-21 | 10.26 | 10.92 | 10.64 | 2.20 | 5 months |
| 5 years | 53.74 | 40.50 | 38.20 | 15.19 |
Nevertheless, the UK stock market has lagged the rest of the world, according to new research by Interactive Investor. Between 23 June 2016 and 11 June 2021, the MSCI Europe ex UK index had total returns of 85%, which was bettered by the MSCI World index returned (104%) and the US’s S&P 500 index (132%). The UK indices had total returns of 40% (FTSE All Share), 37% (FTSE 100) and 49% (FTSE 250). With that hindsight going global would have been the way to maximise total returns if that was your main objective. Being focused on income growth, and thinking that the US was too expensive, it was never an option for me.
Conclusion
I am content with the returns I have made that have beaten my chosen benchmarks. I know I have underperformed against international indices and against portfolios heavy in US and technology holdings. I was not, however, aiming for all out growth. I was mainly seeking income growth, with capital growth as a secondary objective. As my strategy evolves and as my portfolio becomes more focused on small company growth holdings and perhaps more international exposure, I may need to consider a different or additional benchmark in future.