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This post is one of a series looking at returns in the decade after the financial crisis.

Prognosticators did a roaring trade back in 2009. Predictions are never so believable as when our world is falling apart. And a decade ago the ETF industry was increasingly ready to put our money where those forecast-peddling mouths were, via a burgeoning range of specialist ETFs.

What links the trackers featured in today’s article is they all offered exposure to a plausible growth trend that had been widely identified by 2009.

Let’s see how well backing your crystal ball-gazing turned out, compared to investing in the MSCI World (the black line A below, with all graphs sourced from Trustnet):

Selected sector returns 2009 - 2019
You didn’t need to be a visionary in 2009 to spot that the digital economy was expanding like a red giant. The smartest companies were already busy removing annoying, expensive humans from the equation.

Convinced? Then you might have expressed your view through Invesco’s Nasdaq 100 ETF with its big tech bent. (That’s green line G lording it over the graph like Zeus.)

You’d now be sitting on the biggest heap of corn grown by any of the trackers I’ve included in this ten-year review. You’d have smashed the S&P 500. You’d be rolling like Demi Moore on a bed of spondoolicks feathered by 21% annualised returns – or a 574% cumulative return over the decade.

Of course back then I’d just completed my efficient market module that said all known information was already in the price. Everyone knew that Apple, Google, and Amazon et al were the future, so what were the chances of raking in outsized returns on growth stocks that looked expensive even in 2009?

I cry myself to sleep every night.

There was also a demographics story. Aging global populations required expanding health spending and that meant a bright future for big pharma and other medical companies. Hmm, yes, well everybody knows that, so what’s the point? 15.1% annualised returns over a decade is the point. See grey-blue line H on the graph and score another win for the future-gazers who took a position in L&G’s Global Health & Pharmaceuticals Index Trust.

The iShares Global Water ETF twins the population growth theme with the spectre of climate change. The advance of developing economies and environmental pressures meant this idea was a surefire winner, surely? Well, yes, it sure was. The 13.1% annualised returns of this ETF (ticker IH2O) pushed it just ahead of the plain ol’ World index tracker – see the blue line D vs the black line A.

Still climate change wasn’t all good news as iShares Global Clean Energy props up the bottom of the table. Ticker WTF? How did this one lose 1.7% every year since 2009 given all those graphs in The Guardian about the growth of wind and solar? Maybe predicting the future isn’t so easy, after all.

One idea I very nearly bought into was timber. Call it pulp fiction but the theory as I recall it was wood stocks were supposed to enjoy low correlations with common stocks because their profits were influenced more by the weather and political factors. Supposedly, if timber prices fell then you could leave your trees to keep growing and reap greater rewards in the future.

Whatever the truth of timbernomics, you can see from lines A (world equities) and C (world wood) on the graph that the iShares Global Timber & Forestry ETF is no diversifier.1 The world tracker and the timber ETF see-saw in unison, but ultimately the log shows that branching out into wood sapped your returns with a 10.3% annualised result vs 12.1% annualised for MSCI World.

Infrastructure was another tall tale constructed from one-part economic stimulus (remember all the talk about how shovel-ready projects could stoke demand post-GFC?), one-part emerging market expansion (more airports and bullet trains), and one-part public-private-partnership regeneration. Once again you were better off sticking to MSCI World.

That leaves gold miners.

I could just say the gold miners lost 0.8% annualised per year (blue line F) and move on. But there is a genuine diversification story here if you’ve got the stomach for it.

The thesis is that the long-term returns of precious metal equities are far higher than physical gold and on a par with broad market equities. The reason these equities might be precious to us portfolio constructors though is that they’ve historically enjoyed low correlations with the rest of the stock market according to Bill Bernstein.

The problem is precious metal equities are more volatile than bungee jumping.

Bernstein warned:

…since 1963, the precious metals equity (PME) series has lost more than 35% five different times and, on one occasion, nearly 70%.

Between October 1980 and August 1998, it lost a total of 53.8%, or 4.2% annualized—a 7.7% annualized loss after inflation.

For the more than 24 years between October 1980 and December 2004, the real return of PME was –0.3%.

Bernstein suggested that investors with large portfolios could theoretically put a few percent into precious metal equities (such as gold miners) and earn a chunky rebalancing bonus by buying when the sector is in free-fall and selling when it soars.

But would you have the iron discipline to rebalance your precious metal equities against the run of play?

Bernstein didn’t think so:

What percentage of investors has the discipline to stay the course with an asset capable of withering away for an entire generation before reverting to its mean? (If indeed the past 41.5 years have given us a realistic picture of its mean.)

I wouldn’t even venture a guess, but I’m pretty sure that the answer is not too far above zero.

Back in 2009 I placed myself among the zero per cent camp and you should know that the articles I’m quoting above are more than 20-years old. Bernstein was still a believer in precious metal equities in 2015, though. As was Allan Roth in 2016, but Ben Carlson delivered a sanity check in 2014.

Trustnet’s numbers scarcely matter when arrayed against the wealth of data mustered by Bernstein, Roth, and Carlson but they do bring the story up-to-date. Trustnet provides discrete annual returns for each of the last five years. In every single one of those years the L&G Gold Mining ETF was either the best or worst performer when ranged against the other ETFs in my table above.

You can see how wild the ride is by pitting the precious metal equity ETF versus the MSCI World:

Year L&G Gold Mining ETF return (%) iShares MSCI World ETF return (%)
2018-19 -35.8 0.7
2017-18 133 24.3
2016-17 -5.5 19
2015-16 -26.3 11.9
2014-15 67.4 8.8

Source: Trustnet

Of all the sector investing ideas in this section, gold equities is the only one I’d place any store in for the future. The trouble is only Vulcans and sociopaths are likely to pull it off.

Don’t try it if you can’t afford to lose everything you put into this sector or you doubt your ability to withstand double digit losses year in, year out.

In other words… what Bill Bernstein said.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

  1. Note from The Investor: One issue with this ETF is on a look-through basis it’s only partly exposed to trees in the ground. Lots of the companies in the index it tracks are invested in wood processing facilities and similar ‘down forest’ activities. []

The Slow and Steady passive portfolio update: Q3 2019

The portfolio is up 16.25% year to date.

The quarterly numbers for this update of our model passive portfolio are skewed because I’m reporting a week later than normal. Still, the portfolio has jumped another couple of grand and not because of the usual suspects.

UK conventional bonds and global property have each put on 8% since the last Slow & Steady post. Their ascent amply made up for the downward lurch of volatile emerging markets and those pesky UK equities that gyrate every time Boris Johnson waggles an eyebrow.

Here’s the latest portfolio numbers in GlobalSlowdown-o-Vision:

We're up 3.86% since the last report.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Global Property is an instructive case study in how hard it can be to tap into certain asset classes purely with index trackers. The property asset class is meant to enjoy low-ish correlations with equities and bonds – with expected long-term returns falling somewhere between the two.

But the available tracker products invest in the equities of Real Estate Investment Trusts (REITs).

REITs do enable us little guys with our limited investment funds to gain exposure to commercial property in a more practical way than trying to negotiate a broom cupboard lease in a Manhattan skyscraper or owning a smoke alarm in a Dubai shopping mall.

The issue though is that while the share prices of REITs are affected by the underlying property market, they’re also highly correlated to equities.

This multi-asset presentation from Vanguard indicates that REITs only partially map onto the flavour of property prices we’re most familiar with:

US REIT correlation with house pricesAnd this Trustnet Chart shows the photo-finish in 10-year returns between iShares Developed Market Property ETF (invests in developed world REIT equities) and iShares MSCI World ETF (invests in developed world equities with just a percent or two in REITs):

Over 10 years and even five, there’s little between developed world REITs and developed world equities.

Equities outperform REITs handsomely over three years but REITs rule over the last 12-months: 23.9% to 7.3%.

The chart tells us that equities and REITs were highly correlated these last 10 years. The World equities purple line is like the ghost car in a video game for the Dev Markets Property ETF on the red line – only the REIT was the one more likely to make you sick.

Passive investing maven Larry Swedroe wrote an interesting piece on the volatility of REITs and whether they really offer any diversification bonus at all. Swedroe’s conclusion – like my personal experience – is that REITs are an edge case:

…REITs are an equity security with only marginal diversification benefits.

More worryingly, the studies that Swedroe analyzes cast doubt on the likelihood of REITs protecting you in a crisis:

[…] equity returns are significantly more connected to the returns of securitized real estate when both markets are crashing compared to when they are booming.

[…] the timing of extreme market movements between REITs and stock indexes is almost perfectly in sync.

Taken together, the results in this and previous studies do not dispute the long-run benefits of REITs, but they do raise questions about the role of REITs in a mixed-asset portfolio in times of financial crisis.

I’ve been wondering whether REITs are worth their place for a while. Their occasional turn against the run of play – as per last quarter – has stayed my hand. But the mounting evidence is making me question the 10% allocation to property that’s common in the lazy portfolios.

I could easily live without the complexity of a dedicated REIT tracker and take whatever exposure I get to commercial property via global stock markets.

As ever, I’m in no rush. Next quarter the portfolio gets rebalanced with an extra 2% of the allocation tipped towards bonds. That’s likely to be the start of this model portfolio’s move out of REITs.

New transactions

Every quarter we sprinkle £955 into the financial flower beds and hope to come up smelling of roses. Our new cash seedlings are split between our seven funds according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule but that hasn’t been activated this quarter. Therefore our trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £47.75

Buy 0.233 units @ £205.08

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £353.35

Buy 0.916 units @ £385.64

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £57.30

Buy 0.19 units @ £302.41

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B84DY642

New purchase: £95.50

Buy 58.09 units @ £1.64

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B5BFJG71

New purchase: £57.30

Buy 23.416 units @ £2.45

Target allocation: 6%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £296.05

Buy 1.597 units @ £185.34

Target allocation: 31%

Global index-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.36%

Fund identifier: GB00BD050F05

New purchase: £47.75

Buy 44.543 units @ £1.07

Target allocation: 5%

New investment = £955

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table for other good platform options. Look at flat-fee brokers if your ISA portfolio is worth substantially more than £25,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

Weekend reading logo

What caught my eye this week.

A UK budget visualization website did the rounds among certain of my excitable friends this week (I know, with friends like these…) and I promised to flag the tool up here.

I’ve no idea how accurate the data is, which is sourced to 2016 according to the slug. (The ‘total UK budget’ in the tool corresponds to ‘total government spending’ in the 2016 Wikipedia entry for the UK budget.)

Anyway, what they most liked was seeing the representation of our EU expenditure in blue.

No, not the large block of dark blue in the centre – the tiny light blue sliver next to the ‘D’ in ‘Departmental expenditures’:

Click to enlarge (but you’ll still have to squint to see the EU contribution)

That blue trace is the strand that the Conservatives, the Brexit Party, Johnson, Farage, and the rest have whipped this country into a fearful fury over. That is the torrent of money that can save our NHS and Make Britain Great Again. That is apparently worth spending three years fighting about and taking our democracy to the brink over.

In some quarters, that expenditure – much of which comes back to us one way or another – is the reason for all our ills. Apparently.

Of course in more sensible Leave voter living rooms it’s the laws and regulations that matter – not that as far as I’ve heard anyone can ever name more than a few edge cases they object to, and not that we won’t strive to meet EU regulations to trade with them in the future – but still… even for such voters is the juice worth the squeeze, as US rapper Lizzo sang earlier this year?

Most of us long ago made up our minds about that.

[continue reading…]


Way back in the mists of time spring we solicited questions from you for Lars Kroijer, our favourite hedge fund manager turned promoter of passive investing.

You replied with dozens of queries. Almost hundreds. Enough to make us pause and consider how we should go forward.

With the markets riding high, you asked, was it better to wait for a fall before investing? Active managers might lag the market overall but why not invest in those who are winning? And should you hedge your currency exposure?

The questions piled up in comments and over email.

Hence we’ve decided to try something a different – a tie-up between Monevator and Lars’ popular YouTube channel.

Every month we’ll pick three or four of the questions and answer them individually, in video form, as below. If this works then it will hopefully become a regular feature. We’ve already got enough questions to last until 2023 or so, and I’m sure more will come in over time.

So let’s get started!

Please note that embedded videos are not always displayed by email browsers. If you’re a subscriber over email and you can’t see the three videos below, please pop over to the Monevator site to read this: Q&A with Lars Kroijer.

Why not wait for the market to drop before investing?

Congratulations to Monevator reader Steve L. who pops the champagne bottle on our series with a question about market timing:

Lars replies:

The question for this video pertains to a reader who has been wanting to invest in equity markets but has been waiting for a dip to get in at a more favourable price. That dip has failed to materialize and he’s wondering what he should do now.

Yhe first thing I would say is nobody knows what’s going to happen in the market in the future, whether it’s going to be dipping in the near-term or in the long-term.

If you had that knowledge, it would be incredibly valuable, and I suggest you go get rich on the base of it!

What we do know is that the equity markets historically have gone up about four or five percent above inflation per year. This is based on hundreds of years of data and it’s perhaps not unreasonable to guess that markets in the future over the long-term are going to go up by roughly what they had done in the past, given a similar kind of risk profile.

Of course, markets are going to be extremely volatile in the short-term. Nobody knows what’s going to happen and that’s important.

Now, just the fact that in the past you’ve been unlucky and failed to invest right before markets went up does not mean that you should not invest now.

I’d say my view would be there’s no time like the present to get invested in the equity markets, assuming you have the kind of risk profile that allows you to make those kinds of investments. And if you do so of course there’s a risk that you invest right before a market crash and you can be unlucky in doing so.

If you want to avoid this risk, you can spread out your investment over in blocks of three or four. So, say you have $100 to invest you can do that in four blocks of $25 instead of one block of $100.

That does however increase transaction costs and potentially increase tax and other admin costs to you as well.

So, that’s my advice. Get invested and if you can’t afford the near-term risk spread it out over several [time periods].

The pros and cons of currency hedging

The next question is from Richard J., who is concerned about the exposure that his passive funds have to foreign currencies:

Lars replies:

Richard asked whether you should really be hedging currency investments in global equity trackers. This applies to other non-domestic investments too, I assume.

Just to explain what I think he means: If you take an example of someone who invest a £100 into a global tracker – it doesn’t quite work this way but it’s a way to think about it – the provider will take the £100, FX’s the money into various currencies and buys the underlying stocks for those currencies.

So, for example they would take your £100, they FX it into dollars and among other stocks buy Facebook shares.

This would create a dollar-sterling exposure and the question is should you be hedging this exposure?

So, on balance I don’t think you should.

Now, there are a couple of reasons for this.

One is it’s actually really hard to know exactly what your FX exposure is. The reason for this is that the companies that you’re buying shares in themselves have a lot of FX exposure they might be hedging.

You can take Facebook as an example. They have operations all over the world, including in the UK, and it can be hard to know exactly what you should be hedging. Furthermore, I think something like 50% of the earnings of [a market] like the S&P 500 are actually made outside of the US and in a wide array of currencies and so that slightly mitigates the issue and could actually mean that your currency hedging is done wrong.

The second reason you shouldn’t be currency hedging is that it can really be quite expensive and as I alluded to, quite imprecise, not only for the reasons I mentioned but also even if you did get the exposure right you should really constantly be trading around this, as shares and the various currencies move up and down. This would lead to very significant transaction and admin costs which would impair your returns in any currency.

The third argument why I don’t think you should be hedging your FX exposure is that FX exposure can actually be a diversifier.

So, if you think of your £100… You’re buying not only exposure to companies in many, many countries but you’re also buying exposure to many currencies, so if there is a shock in your local currency – in this case sterling – the fact that you hadn’t hedged the currency actually means that you’d be better off. Shocks in currency markets tend to move against your local currency and are really a ‘shock up’. So actually, this is not only cheaper and less cumbersome et cetera, but it’s actually probably a good thing to not be currency hedging.

The argument for currency hedging is that you should be investing your money in the currency where you eventually need the money and I think there’s some truth to that.

But […] there’s the admin, transaction costs, that natural diversifier… and at heart that it’s hard to know what actually what the right exposure is.

If despite these facts you still want to currency hedge, I would question whether you really should be investing in as risky an asset as equity markets can be.

Why not invest with a winning fund manager?

Finally for this month, why not run your money with a star fund manager like Nick Train or Terry Smith, asks reader Paul K.?

Lars replies:

The question in this video comes from a reader who although he is a fan of passive investments asked why should we not just invest our money with a star active fund manager? He says Fundsmith or Lindsell Train but there are many.

So, first of all he’s saying he’s a fan of passive which I take to mean that he doesn’t think we should go and invest and try to pick Facebook versus Google versus Apple and a thousand of other stocks but instead invest in markets as a whole and sort of take a passive approach.

But the question is then why not get someone to make our investments for us? Someone who’s presumably done very well in the past.

The answer to the question really has a bit to do with statistics.

If you look at it over a ten-year horizon, only ten to 15% of active fund managers outperform the index of the markets that they operate in.

So, if you think of the S&P 500 or someone that is operating in those markets, only 10 to 15% of them will actually do better than that index over the decade.

Now that’s not necessarily because they’re bad managers. It’s just that because on top of the fees that they’re charging you they incur other costs, like bid-offer spreads, sometimes auditing, trading costs and so forth. It all adds up over time.

[The reason] we often think that the active managers do better than they actually do is because of a huge selection bias.

So, if you go ten year back in time and look at the top hundred managers then only, statistically, ten or 20% of those are still around and because [the industry] focuses on those we tend to forget all the ones that didn’t do well and think therefore that everyone did well. So that’s a typical selection bias.

I’m not saying that the ability to pick individual stocks or indeed [successful] active managers doesn’t exist.

I’m just saying it’s a very tall order to claim that you have [that edge], and particularly the ability to pick the ten to 15% top managers ahead of time is a very, very tough tall order to claim.

Until next time

We know it’s been a bit of a wait to get started with these questions. But hopefully the news that reader favourite Lars will be a regular feature on the site for a while makes up for it.

Let’s hear what you think about Lars’ replies – and any other feedback please – in the comments below.

Check out Lars’ previous Monevator pieces and his book, Investing Demystified.