15th June 2016
Money in best buy cash savings accounts would have produced a higher return than a FTSE100 shares tracker over a majority of investment periods since 1995, new research from journalist Paul Lewis suggests.
The BBC Money Box presenter says the new research, using best-buy cash data, has never been made available before.
Lewis contends that the results challenge the traditional view that putting money in a savings account is the poor relation of investing in shares.
The analysis found that since 1995 investments in funds that track the FTSE 100 would have lost money up to a third of the time over investment periods from one to eleven years. Cash in a savings account always ends up higher than it started.
The new research compared returns from a simple tracker fund – which follows or ‘tracks’ the FTSE100 index of shares in our biggest hundred companies – with cash that is moved each yearinto a best buy one year deposit account with a bank or building society – sometimes called a ‘one year bond’. The tracker has dividends reinvested and the cash is reinvested each year into the best buy account.
It found that money put into this ‘active cash’ beat the total returns on the tracker in 57% of the192 five year periods beginning each month from 1 January 1995 to the present. The tracker won in just 43% of periods. For some longer time periods the result were even more marked.
For example, for investments made over the 84 fourteen year periods from 1995 cash beat shares 96% of the time.
The research was done by Lewis himself in his capacity as a freelance journalist using best-buy cash data back to 1995 from the financial information publisher MoneyFacts. Data back to 1995 has never been made available since it first appeared in the monthly MoneyFacts magazine. He says this data makes the research unique.
“This analysis of the new data shows that people who prefer the safety of cash can make returns that beat those on tracker funds in a majority of time periods. It also confirms that the risk of making losses on a shares investment is very real. Over any investment period from one to five years from 1995 to 2015 there was about a 1 in 4 chance or greater that the value of the investment would fall. Even over nine or ten years the chance of losing money was around one in ten. Few advisers know those odds still less inform their clients of them.
“I have long suspected that the merits of cash were underplayed by traditional research which compares poor cash rates with often exaggerated gains on investments in shares.”
Lewis argues that the new research is different for the following three reasons.
Further analysis of the data shows that for many starting dates from 1 January 1995 investing in shares over any possible period from one year upwards would have produced a lower return than using properly managed best buy cash. That is true for example for the whole of the two years from 1 October 1999 to 1 September 2001 and for four months from 1 October 2007 to 1 January 2008. Money invested on the first of any month on those dates and left for any period from 1 year to the maximum possible 15 or 16 years would have done better in cash than shares.
There are fewer comparable times when shares produced a higher return over every possible investment period:- 1 November 2008 to 1 September 2009 is the longest run and two earlierdates are 1 October 2002 and 1 October 2003.
Overall for investment periods of five years or more there are 38 starting dates when cash would always have produced a better return but only 24 starting dates when that was true of shares.
Lewis adds: “Cash is not right for everyone in all circumstances. But for a cautious person investing for periods of up to 20 years this research indicates that well managed active cash beat a FTSE100 tracker more often than not. And unlike a shares investment it can never lose anyone money.”
Money invested in best buy cash over the whole 21 year period from 1 January 1995 to 1 January 2016 would have produced an average annual compound return of 5.0%. Over the same period the tracker would have produced a compound annual return of 6.0%. The 1% difference is far lower than the 3% to 8% typically quoted for the ‘risk premium’ of investing in shares.
The release from Mr Lewis includes further information which we have included below under his headings.
Lewis compared the gains on best buy ‘active cash’ with the actual returns on an HSBC tracker fund which followed the FTSE100 index of shares in the biggest quoted companies on the London Stock Exchange. Dividends earned by the shares are reinvested. Tracker funds are seen as a cheaper and safer alternative to funds run by managers who seldom beat the market consistently over long periods of time.
The calculations used by the research have been carefully checked by experts in the investment industry and by a professional actuary.
It is assumed that the money is invested in shares on the first of the month and cashed in on the ‘nth’ anniversary where n is the investment period.
The FTSE100 tracker used in the analysis was the HSBC FTSE 100 Index Retail Inc. The data provided by Morningstar is the actual growth in the fund with dividends reinvested minus any charges and reflects the actual net return on the date at the end of the investment. The current charges of the HSBC fund are 0.18% p.a. but in the past they were higher. The analysis was also run with other FTSE100 tracker funds and a FTSE100 All Share fund – all in the Investment Association Retail Primary Share Class – over dates to the end of 2015 beginning from 1 January 1996 and 1 March 1998. The results were not markedly different from the original HSBC tracker.
The tracker – the HSBC FTSE 100 Index Retail Inc. – was used for all analysis as the data goes back the furthest. Earlier data for trackers is not available.
The best buy cash data was from the Savings Selection in the MoneyFacts monthly periodical using the top return for a one year bond (or closest) for smaller investments less than £2500 where possible and not exceeding £10,000. This data prior to 2007 has never been released before. The figures were extracted from MoneyFacts monthly periodical as published beginning January 1995 to match the period of the tracker data.
It is assumed that the money is invested in a cash one year bond on first of each month, cashed in one year later, and reinvested at once in the current best buy. That process is repeated n times where n is the investment period in years. The delay between the end of the one year bond and reinvesting it in a new one could have been around two weeks in the past, though nowadays would be much shorter or negligible. That is hard to account for. One way is to assume that interest rates were in fact 50/52nds of the true rate. Running those numbers does not change the overall result.
The returns on cash do not take account of income tax. Money in cash ISAs or cash in a pension fund is not liable to income tax. And from 1 April 2016 the Government says 95% of people with cash savings will pay no income tax on the interest. If the numbers are run with the interest reduced for basic rate tax cash still beats shares in the majority of time periods, though the effect is smaller.
The results do not take account of inflation which affects investment returns to the same degree it affected cash returns. Deflating the results for cash and for shares by inflation would not have changed the relative position of the two nor changed the number of ‘wins’ for each.
The best known and longest running research which compares different forms of investment – the annual Barclays Equity Gilt Study – overstates the returns on a real investment in shares by excluding the reduction in yield caused by charges. Over the 21 years 1995-2015 its data show a compound growth of 7.3% in reinvested shares compared with the 6.00 of this research. It also understates the return on cash by using a cash surrogate – three month Treasury Bills – for its analyses. That data shows compound growth over 21 years from 1995-2015 of 3.9%. The 2015 return on Treasury Bills is 0.45%. For comparison it also uses the interest paid on cash in an instant access postal building society account. That data shows compound growth over 21 years from 1995-2015 of 2.7%. The Nationwide account used since 1998 pays interest of just 0.25% a year. These two methods both produce lower figures than best buy accounts, understating the returns particularly badly from 2008. At January 2016 the best buy cash was returning 1.65% on easy access and 2.10% on one year bonds – the accounts used for this study.
The past and the future
Like all research using data this study is about the past. The results are clear. But the lessons for the future are complex. Interest paid on cash is at historically low levels and seems to be heading lower. The charges on trackers have come down from their past levels. But losses on trackers are still happening – in 2015 for example.
The mantra about the past being no guide to the future is true of managed funds providing good investment returns (though bad returns do tend to persist). But they are not relevant to a study such as this which assumes that no moment is special and looks at the results of picking a random date (on 1 st of month) and investing for a random period (1-20 whole years). Analysis shows that beginning on any date in the month produces identical results. There is nothing to indicate that the stock market experience of the last twenty-one years is not typical. Barclays Equity Gilt Study found on its own figures that the percentage of periods when shares beat cash over the 21 years 1995 to 2015 and the 115 years back to 1899 were very similar over six investment periods from 2 to 18 years.