Bitcoin has "trounced traditional investment strategies over one and ten years, but it remains a speculative gamble", according to the inaugural AJ Bell Investor Strategy League revealed today ( 12 January) which compares performances of different consumer investing styles to find out which have done best over the last year and decade.
The Bitcoin returns are followed (not very closely) by a global tech stock portfolio, while cash has been the weakest strategy over ten years.
Index investors beat stockpickers in 2021, but over ten years stockpickers are just ahead and it was strong year for residential property yet this sector only bags a mid-table spot.
ESG funds are also mid table, but considerably ahead of sin stock investors.
Safe haven strategies like cash, gold and bonds are languishing at the bottom of the performance league over one and ten years, was among the further findings, including how Warren Buffett had a good year, but only just nudges ahead of AJ Bell's random fund picker, Binky the cat.
Laith Khalaf, head of investment analysis at AJ Bell, said: "Professional investment strategies tend to be characterised according to four main style factors: growth, value, quality and momentum. However, it's clear that consumers have a much broader approach to managing their finances, which encompass not just these stock market factors, but other assets such as cash, property and more recently, cryptocurrencies. Some consumers invest actively, others prefer index funds; some follow specialist strategies, while others look to limit risk.
"There's no exhaustive list of investment styles, and many retail investors will mix and match. But there's a dearth of literature which compares the different strategies that consumers, rather than professional investors, might pursue.
He added: "The AJ Bell Investor Strategy League seeks to address this by looking at the performance of some key styles, strategies and asset classes that ordinary savers might adopt, ranking returns over one and ten years.
"This is the inaugural annual report, and we anticipate it will slowly change over time to reflect new investment trends, but each edition should reveal some of the key factors affecting investor returns and provide some context for financial decisions in the coming year."
Khalaf continued: "The overarching themes running through this year's report are technology and risk. The top of the performance league is dominated by investment strategies that have had a big boost from US tech stocks. Basically, the higher your tech exposure over the last ten years, the better for your investment returns. The valuation of the US tech sector still divides opinion, but one thing everyone can agree on is it can't be ignored, seeing as it now makes up such a large part of the global stock market.
"Risk has also been rewarded over the last ten years. This isn't unusual, as over longer periods taking on higher risk should deliver better returns. The scale of the performance differential between higher risk equity strategies and safe haven assets is startling, however.
"A low-risk cash approach has turned £1,000 into just £1,142 over the last decade, while that £1,000 would now be worth £3,435 if invested in a global passive fund, and £8,140 for an investor who had gone all in on technology stocks. An analysis of long run historical returns tells us there's a very strong chance that the stock market will outperform both cash and bonds again over the next decade, but it would have to pedal pretty hard to recreate the stellar growth seen in the last ten years."
|
10 years |
1 year |
||||
|
Investor style |
£1,000 invested |
Investor style |
£1,000 invested |
||
|
1 |
Bitcoin believers |
£11,135,639 |
1 |
Bitcoin believers |
£1,615 |
|
2 |
Tech heads |
£8,140 |
2 |
Tech heads |
£1,341 |
|
3 |
Growth investor |
£4,917 |
3 |
World's best investor |
£1,309 |
|
4 |
Quality investor |
£4,821 |
4 |
Binky the cat |
£1,282 |
|
5 |
Momentum investor |
£4,728 |
5 |
Quality investor |
£1,268 |
|
6 |
World's best investor |
£4,509 |
6 |
Value investor |
£1,231 |
|
7 |
Performance chasers |
£3,967 |
7 |
Small Cap backers |
£1,229 |
|
8 |
Small Cap backers |
£3,781 |
8 |
Growth investor |
£1,223 |
|
9 |
ESG champions |
£3,627 |
9 |
International indexers |
£1,214 |
|
10 |
Global stockpickers |
£3,501 |
10 |
Income investors |
£1,184 |
|
11 |
International indexers |
£3,435 |
11 |
Performance chasers |
£1,177 |
|
12 |
Investment trust investors |
£3,422 |
12 |
Herd investors |
£1,177 |
|
13 |
Value investor |
£2,852 |
13 |
ESG champions |
£1,168 |
|
14 |
Egg spreaders |
£2,801 |
14 |
Global stockpickers |
£1,168 |
|
15 |
Sin seekers |
£2,493 |
15 |
Momentum investor |
£1,157 |
|
16 |
Contrarians |
£2,436 |
16 |
Property tycoons |
£1,152 |
|
17 |
60/40 disciples |
£2,301 |
17 |
Egg spreaders |
£1,120 |
|
18 |
Property tycoons |
£2,207 |
18 |
Investment trust investors |
£1,103 |
|
19 |
Income investors |
£2,151 |
19 |
Pension defaulters |
£1,103 |
|
20 |
Pension defaulters |
£2,096 |
20 |
60/40 disciples |
£1,095 |
|
21 |
Binky the cat |
£2,072 |
21 |
Contrarians |
£1,035 |
|
22 |
Herd investors |
£2,046 |
22 |
Cash savers |
£1,003 |
|
23 |
Institutional fund investor |
£1,676 |
23 |
Institutional fund investor |
£999 |
|
24 |
Bond buyers |
£1,380 |
24 |
Sin seekers |
£988 |
|
25 |
Bargain hunters |
£1,358 |
25 |
Gold bugs |
£967 |
|
26 |
Gold bugs |
£1,280 |
26 |
Bond buyers |
£946 |
|
27 |
Cash savers |
£1,142 |
27 |
Bargain hunters |
£886 |
Total returns in GBP to 31 Dec 2021
Sources: AJ Bell, FE, Morningstar, ONS, Refinitiv, Bank of England, Cointelegraph, full category definitions available in appendix below
Investment strategies in detail
AJ Bell's number crunching showed the best returning asset of the last year, and indeed the last decade, has been Bitcoin. The returns on offer for Bitcoin believers have simply dwarfed other investment options, and a tiny investment could have made you very rich indeed.
The cryptocurrency also topped the performance table over the last year with a 61.5% return in pounds sterling. That's relatively lacklustre by its own standards, compared to returns of 1,271% in 2017 and 5,758% in 2013. The performance figures are close to incomprehensible, and suggest that anyone jumping on the Bitcoin bandwagon now is somewhat late to the party.
They might still have a jolly good time for a while, but they aren't going to be quaffing as much champagne and caviar as the early birds.
In order to generate the same return in the next ten years as the last decade, the Bitcoin price would need to rise to around £380 million per coin, or $520 million, at current exchange rates. Far-fetched doesn't begin to cover it.
Those who have sat out the crypto craze can console themselves with the fact that the number of Bitcoin believers who have captured the full ten-year return is probably as small as that number is large.
Ten years ago, Bitcoin was little known, and those who did know about it would have just witnessed the hacking of the Mt Gox Bitcoin exchange in 2011. Even if they had been brave enough to buy some coins, to enjoy the entire return of over £11 million on a £1,000 investment, buyers would have had to watch their investment double in value 13 times without cashing in any profits.
They would also have had to casually sit by and not press the intense panic button as their investment fell by 73% in 2018. Indeed in 2010, a US computer programmer called Laszlo Hanyecz reportedly spent 10,000 Bitcoin on two pizzas, in what is widely regarded as the first ever cryptocurrency transaction.
Those Bitcoins would now be worth over £300 million. This story suggests that even the very early Bitcoin adopters had no real inkling of what was to come.
The risk with an asset that has appreciated so vastly is of course that the price peaks, and the subsequent fall is just as astonishingly sharp as its ascent. One only has to look back just over twenty years to the madness of the dotcom boom to recall companies that experienced rocketing share prices, only to become worthless after the bubble burst.
One dot com darling which weathered the storm and still survives today is Nokia. An early investor buying €1,000 of shares in 1991 would have seen their holding swell in value to €398,280 at the peak in 2000, though that would have fallen back to €33,620 today. A more cautionary perspective is that €1,000 invested at the peak would now be worth just €84.
Looking forward, the future of cryptocurrency still hangs in the balance. Goldman Sachs just issued a fairly bullish note on Bitcoin, which it sees increasingly usurping gold's role as a store of value. But it would have to exhibit far less volatility, gain much greater regulatory approval, and achieve a lower carbon footprint, before it made it significant inroads into mainstream professional investment portfolios.
Meanwhile the longer-term adoption of crypto as a means of exchange by businesses and consumers is still highly uncertain, especially given its volatility. Continued scrutiny and pressure from regulators on issues of consumer harm, money laundering, and carbon emissions may also dent crypto prospects, as could central banks issuing their own digital currencies.
The golden rule of investing in crypto is not to invest any money you can't afford to lose, AJ Bell said.
And if you get lucky, it's probably best not to splash out on a bottle of fizz before you've got the profits firmly in your bank account in pounds, dollars or euros, because gains can disappear in the blink of an eye. So far in the first few days of 2022, the Bitcoin price has already fallen 12%, which suggests it's still less of an investment strategy, and more of a speculative gamble.
Behind Bitcoin believers, tech heads (as represented by the Legal & General Global Technology Index fund) have come a distant second place. However, a 34.1% return over 2021 and a 714.0% return over ten years is certainly not to be sniffed at. It is of course the performance of the US tech titans which have driven this success, and opinion over their future prospects remains firmly divided.
These companies enjoy extremely strong competitive positions and boast customer numbers that have never been witnessed before in corporate history. But they also trade at high valuations, which could be trimmed if earnings growth slows, or if higher inflation and interest rates cause investors to reassess the premium they're willing to pay for long term cash flows. Tech investors have done very well over the last decade, but putting all your chips in one sector is a risky business, so investors who have ridden the wave should consider diversifying beyond today's digital success stories.
In third place over the last year, Warren Buffett's investment approach has reaped rewards for Berkshire Hathaway investors, to the tune of 30.9%. Over ten years the world's best known investor (and probably the greatest of all time), comes in in sixth place, with a total return of 350.9%. Buffett is associated with value investing, but as he points out, growth and value are two sides of the same coin.
His investing approach can therefore be best described as Growth at a Reasonable Price, or GARP for short. Returns for Berkshire Hathaway in 2021 have been bolstered by a stake in Apple which was worth $120 billion at the start of the year.
The stock gained 34% over the course of 2021, though we don't know the exact value now as Buffett may have bought or sold stock. As at the beginning of 2021, Berkshire Hathaway held over 5% of Apple shares, and built his stake up at a cost of $36 billion between 2016 and 2018.
Exposure to energy within the Berkshire Hathaway portfolio will also have helped performance over the last year as prices have shot up, likewise financial holdings have benefited from expectations of interest rate rises. The main share class of Berkshire Hathaway is currently trading at a princely $480,000 a share, but investors can gain exposure through the B shares which are available at a still quite pricey $320 a pop.
He might be the world's best investor, but in 2021, Warren Buffett only narrowly beat our random fund picker, Binky the cat. Binky gets to choose one of 2,700 UK retail funds at the end of each year. While she is afforded the potential benefit of perfect hindsight, she selects funds by getting her human minions to pick one at random using something called Excel, so she can get back to important matters like napping and eating kibble.
This year she chose the snappily titled Schroders Personal Wealth Multi-Manager Global Real Estate Securities fund, which returned a handsome 28.2%. The fund invests in a portfolio of global REITs (Real Estate Investment Trusts), and benefited from the vaccine-induced economic recovery, and the knock-on effect on property values.
Binky's scattergun approach hasn't served her well over the long term though, and she ranks 21st out of 27 competing investment styles over ten years. She's still ahead of bond buyers and cash savers though. For those tempted to choose funds with a dart and dartboard, Binky's long-term returns suggest there are much better methods, unless you've got someone else to pay all your food and medical bills of course.
At the bottom end of the table, bargain hunters had a poor 2021, registering an 11.4% loss. These investors like to catch falling knives in the hope of a rapid rebound, so at the beginning of each year, they invest in the worst performing sector over the previous twelve months.
In 2020 that was Latin America, but in 2021 it went on to produce similarly disappointing results. Over the long term the bargain hunting approach has also proved to be a flop, returning 35.8% and ranking 25th out of 27 investment strategies. Bargain hunting relies purely on performance to determine what is investable, and normally there is a good reason why prices are heading in a certain direction.
Markets do tend to overreact, but it can take a considerable time for them to correct, so bargain hunting should be undertaken with a very long-term investment horizon in mind. It should also be done with reference not to price performance but to valuation, which relates the price of the stock to the underlying state of the company.
Interestingly using the opposite approach to bargain hunters, performance chasers fared considerably better. These investors put money into the best performing sector of the last 12 months, this year that was the Tech and Telecoms sector, which has gone from strength to strength, returning 17.7% in 2021.
This strategy has also hit the top half of the performance league over ten years, though this is a period which has been characterised by deeply entrenched investment trends, and a long bull market. Conventional wisdom suggests that when the market winds change direction, performance chasers could find themselves in more challenging territory.
Cash savers have fared worst over the last ten years, posting a meagre 14.2% return, and though base rate has now ticked back up slightly, inflation will more than offset any tiny gains cash savers can expect.
Remarkably though, huge sums of money continue to flow into cash, something which even the FCA is now explicitly seeking to address as part of its three-year strategy. The FCA estimates that 8.6 million UK consumers are holding more than £10,000 of assets in cash which could instead be invested. The long-term numbers from our Investor Strategy League show precisely why that might be a good idea, particularly when you consider the effects of inflation, which are shown in the chart below.
Sources: AJ Bell, Bank of England, ONS, figures show real returns dating back 1,3, 5 and 10 years from 31st Dec 2021if held in the average Cash ISA.
Other safe haven assets also find themselves at the bottom of the league table over the last year, and even the last decade. Bond buyers had a challenging 2021, seeing a 5.4% fall in the value of their investment, as improved economic conditions, inflation and the expectation of interest rate rises prompted a reappraisal of the sanctuary provided by gilts.
Despite extremely positive conditions for the gilt market over the last ten years, bond buying still only ranks 24th out of 27 investment strategies in the last decade. That's because in a low interest rate, high liquidity environment, risk assets have done even better. Gilt yields are still extremely low, currently 1.2% on the 10 year bond, which means there could be more pain to come if interest rates normalise.
Gold bugs also had a poor 2021, registering a 3.3% fall in the value of their holdings. With the latest reading showing CPI running at over 5%, that pours cold water on the idea that gold is a good inflation hedge, at least in the short term.
Over the last decade, gold has failed to deliver too, returning just 28% for investors, and ranking second bottom in our league table. It should be noted that the beginning of our ten-year comparison period coincided with a bull run in gold, which saw its value peak at over $1,800 an ounce at the back end of 2011.
The yellow metal now trades again at around $1,800 an ounce, but British gold bugs have also enjoyed a boost from sterling weakness. Despite gold now trading at roughly the same level as in 2011, it hasn't been a smooth journey - the gold price fell back to under $1,100 an ounce in the intervening period, and its blushes have really only been saved by the pandemic revitalising demand.
Source: Refinitiv
Like Bitcoin, gold is a speculative asset because returns rely on investors being able to offload their holding onto someone else who will buy it at a higher price. You might say that any asset is only worth what the market is willing to pay for it, but stocks and bonds produce cashflows, which provide a basis for valuation, and set a lower limit for prices. Gold has no such safety net, which explains why it exhibits such high levels of volatility, despite being perceived as a safe haven.
Gold faces a number of challenges in 2022, in particular the prospects for higher interest rates, which make cash, and bonds, more attractive relative to the precious metal. It's also possible that Bitcoin may start to take some flows away from gold if it starts to become established in the investment industry as an alternative asset, though the gold market's much longer history, investment infrastructure, and regulatory rubber stamp stand it in good stead on that front. Gold can perform a role in a portfolio as an asset which behaves a bit differently from the rest, but it shouldn't make up more than 5 to 10% for most retail investors.
The UK residential property market had a bumper year over the last year, with the latest reading from the ONS showing 10.2% annual price growth. We have assumed a 5% rental yield on top, after costs and void periods, but not taxes, giving property tycoons a 15.2% return over the last year.
That makes 2021 the best year for residential property investment in the last decade, though in such a risk on year, a very healthy return was outshone by many other investment strategies. The same holds true over ten years, where a 120.7% total property return is in the bottom half of the performance table.
Residential property returns are regionally sensitive and so returns in some locations may vary considerably from our estimate. We have also modelled a cash investment in property with no borrowing, to provide a level comparison with other investment strategies.
However, many landlords will have turbo-charged the returns on offer by leveraging up with mortgage debt and benefited from historically low interest rates.
That will be offset to some extent by high transaction taxes and fees, in particular stamp duty. After a bumper period for sales driven by the stamp duty holiday, most expect 2022 to be a quieter year for the UK property market. That doesn't mean returns will entirely dry up however. Interest rates are still low, as is unemployment, and a shift to flexible working is likely to continue to encourage some consumers to move home, driving transaction volumes, and underpinning prices.
ESG champions invest in the average global ethical fund, and they have significantly outperformed sin seekers, over both one and ten years. There are no packaged products available to UK investors which invest in sin stocks, so we had to reach across the Atlantic for a proxy for this investment style.
The USA Mutuals Vice fund has been running since 2002, and invests in tobacco, alcohol, gambling and defence sector stocks. It doesn't invest in oil and gas sectors though, or it might have had a more fruitful 2021. Over ten years the Vice fund is in the bottom half of the table, though it had actually performed pretty well against the MSCI World Index until the last two years.
It seems the writing may be on the wall for sin stocks, given the increasing focus on ESG credentials. However, 2021 was not a particularly outstanding year for global ESG funds, which fell behind a simple passive approach (international indexers). Things look better over a ten-year time period though, where ESG funds have beaten the typical tracker fund and also the average active fund (global stockpickers). It's only very recently that ESG investing has hit the mainstream, though it does look here to stay, and longer term may simply become part of almost every fund's investment process, to a greater or lesser degree.
Elsewhere in the global equity space, global stockpickers, international indexers and investment trust investors are all tightly bunched in the performance table over ten years. These categories comprise the average global active fund, average global passive fund and average global investment trust respectively. (There will be an element of survivorship bias in the global stockpickers, international indexers, and ESG champions categories). All three fall considerably behind three factor-based approaches however - growth investors, quality investors, and momentum investors.
While the MSCI indices that represent these styles are constructed using separate methodologies, all roads lead to Rome, or in this case, the tech sector. These indices hold 38%, 39% and 34% in tech respectively, compared to 24% from the MSCI World Index, which provides a benchmark for most active and passive funds in the global sector.
The tech sector finds itself with such a heavy weighting in the MSCI factor indices, because over the last ten years the big US tech stocks have exhibited growth, quality, and momentum characteristics.
The strong performance of the tech sector goes a long way to explaining why growth, quality and momentum investors have done so well in the last decade. Indeed over ten years, the top 5 performing strategies in the Investor Strategy League have been elevated by technology exposure.
The other factor index, MSCI Value, has just a 9% exposure to the tech sector, hence why it sits so far below the others over ten years. 2021 was a brighter year for value investors however, thanks to the resurgence of the economically sensitive areas that feature more heavily in this strategy, like energy and financials. Despite the value rally in 2021, quality investors still ended the year with their noses just ahead though.
In UK Equities, small cap investors sit near the top of the league table over both one and ten years, but haven't quite been able to disrupt the hegemony of tech dominated strategies. Small cap investing sits at the riskier end of the spectrum, but has delivered outsized returns over the long term, particularly when combined with active management. Income seekers investing in UK Equity Income funds enjoyed a strong year in 2021, with many UK dividends coming from oil and gas companies, miners and financials, sectors that have enjoyed improved fortunes since vaccines arrived on the scene.
Over ten years the returns from a UK Equity Income portfolio have been less impressive, with this strategy faring worse than a 60/40 portfolio, or indeed a property investment. This has been a period when the economically sensitive UK stock market has been out of favour, battered by the financial crisis, Brexit, and the pandemic.
However, stocks are a useful source of long-term income, and the UK stock market is one of the best income payers, largely because cyclical old economy stocks like banks, insurance companies and mining firms tend to pay more of their profits out as dividends, compared to growth companies which prefer to use cash for re-investment within the business. Unlike a property investment, the tax payable on UK Equity Income funds can be carefully managed too, using SIPPs, ISAs, and the annual capital gains tax allowance.
Herd investors, who invest in the most popular retail fund sector of the previous 12 months, have had a bright few years - the global sector has been the most popular, and one of the best performing, for three years now. Longer term, these investors rank 22nd out of 27 strategies though, behind their nemeses, contrarian investors, who invest in the least popular fund sector of the previous twelve months.
That's largely because the most popular sector in the last ten years has included lower risk areas like absolute return funds, bonds and mixed asset funds. Meanwhile the contrarian approach has been dominated by the UK All Companies sector, which was the least popular sector in seven of the last ten years.
While UK equities might not have performed as well as other regional stocks, the higher risk and reward profile of equity investments means they have still beaten lower risk asset classes.
Egg spreaders have performed better than both herd investors and contrarians over the last ten years. These investors simply spread their investment equally over five equity regions - the US, UK, Europe, Japan, and Emerging markets, rebalancing their portfolio at the beginning of each year. This approach has failed to beat a global passive approach though, reflecting the dominance of the US stock market, which makes up around two thirds of a global passive approach, compared to just 20% of the egg spreader's portfolio.
The most popular fund sectors with institutional fund investors haven't fared well at all, ranking at the bottom of end of the league table over both one and ten years. The most popular institutional sectors over the last year have tended to be low risk - absolute return funds, money market funds, and volatility managed funds. This may be because large institutional investors manage direct equity portfolios themselves and use funds to gain exposure to areas where they don't have in-house expertise.
In the mixed asset sectors, 60/40 investors (60% equities/40% bonds) and pension default investors find themselves in the bottom half of the league table over both one and ten years. Seeing as these strategies seek to limit equity risk this is perhaps not surprising. However, it does suggest that many pension investors, who may have 20, 30 or 40 years until they access their money, could do significantly better by pursuing an equity-based strategy.
Over the last ten years a typical balanced pension fund has turned £1,000 into £2,096. A decent return, but significantly less than the £3,435 that same pension investors would have received by choosing a simple global passive fund.
Appendix: Investment strategy definitions
All performance is presented on a total return basis in GBP. Categories market with a * include an element of survivorship which is likely to elevate returns.
Bitcoin believers - Bitcoin price change.
Tech heads - Legal & General Technology Index fund.
Growth investor - MSCI World Growth Index.
Quality investors - MSCI Quality Index.
Momentum investor - MSCI Momentum Index.
World's best investor - Warren Buffett's Berkshire Hathaway.
Performance chasers - invest in the best performing fund sector of the previous 12 months, and switch investments at the beginning of each year.
Small cap backers - Investment Association (IA) UK Smaller Companies sector average.
ESG Champions - performance of the average ESG fund in the IA Global sector.
Global stockpickers - performance of the average active fund in the IA Global sector.
International indexers - performance of the average passive fund in the IA Global sector.
Investment trust investors - performance of the AIC Global sector average.
Value investor - MSCI World Value Index.
Egg spreaders - 20% invested in each of the following sector averages and rebalanced annually: IA North America, IA UK All Companies, IA Europe excluding UK, IA Japan, IA Global Emerging Markets.
Sin seekers - the USA Mutuals Vice fund.
Contrarians - invest in the least popular retail fund sector of the previous twelve months, as determined by Investment Association fund flow data.
60/40 disciples - invest in a portfolio comprising 60% equities and 40% bonds, as represented by the Vanguard LifeStrategy 60% Equity fund.
Property tycoons - an investment in the average UK property with no borrowing. Price rises are determined by the ONS House Price Index, and rental yields are assumed to be 5% at outset, net of fees and void periods, and are increased annually in year in line with the ONS Index of Private Housing Rental Prices.
Income investors - the IA UK Equity Income sector average.
Pension defaulters - the ABI Pensions Mixed Investment 40-85% Shares sector average.
Binky the cat - one of 2,700 retail funds in the IA sectors selected at random each year.
Herd investors - invest in the most popular retail fund sector of the previous twelve months, as determined by Investment Association fund flow data.
Institutional fund investor - invest in the most popular institutional fund sector of the previous twelve months, as determined by Investment Association fund flow data.
Bond buyers - the IA UK Gilts sector average
Bargain hunters - invest in the worst performing fund sector of the previous 12 months, and switch investments at the beginning of each year.
Gold bugs - gold price change
Cash savers - effective interest rate paid on the average Cash ISA account.
