23.10 Liontrust Views Autumn 2023 Literature (Single) - Flipbook - Page 9
We firmly believe diversification works over
the long term. Yet, in 2022, diversification
failed. It was a very rare year in which both
equities and fixed income generally delivered
negative returns. Returns were almost uncannily
consistent regardless of how much risk – or
equity exposure. For investors, a 10% fall in
value of their investments for what is deemed to
be a relatively low risk approach would have
been unwelcome and surprising. This followed
more than a decade of a low cost of capital
and therefore attractive real returns for equities.
Missing out on the best days
Value of £10,000 invested in the FTSE All Share: January 1986 – July 2023
£240,000
£243,168
£119,009
£163,766
£189,859
£206,072
£216,571
£223,618
£200,000
£160,000
£120,000
£124,159
£80,000
£79,401
£40,000
£53,309
£37,096
£26,597
Over the past year to 18 months, of course,
we have seen a significant rise in interest rates
in response to much higher inflation. This has
made it appear to many savers that keeping
money in cash is more attractive, as returns
from bank and building society accounts also
rose with interest rates. This is especially the
case when combined with the returns from
investment markets in 2022. One of the
most frequent questions we have been asked
is if people should hold cash rather than be
invested in equity and fixed income markets.
Cash can be a good place to park savings
when you have a short time horizon so you
are not subject to the volatility of investment
markets. Extending the time you keep savings
in cash, however, is an active decision not
to invest and you might miss out on the longterm benefits of investing in markets. This
includes generating real returns above the
rate of inflation. Over the long term, equities
have historically outperformed cash, bonds
and inflation.
You can see this by looking back at the
performance of stock markets, government
bonds and cash over the last 20 years and
adjust for inflation to get the real returns from
all three as shown in the chart below. £1 left
in cash for 20 years would have a purchasing
Invested All
Days
Missing 10
Best Days
Missing 20
Best Days
UK Gilts All Maturities TR
2005
2007
2009
2011
2013
Missing 40
Best Days
Missing 50
Best Days
Missing 60
Best Days
+9.2%
+8.9%
+8.5%
+7.7%
+7.5%
+5.9%
+5.7%
+5.3%
+5.2%
+5.2%
24 Nov 08
24 Mar 20
19 Sep 08
29 Oct 08
13 Oct 08
10 Apr 92
21 Oct 87
08 Dec 08
13 Mar 03
10 May 10
Source: Morningstar, 1 January 1986 to 31 July 2023.
power of 86p today. Whereas £1 invested
in the UK stock market for 20 years would
be worth over £2.20. You would have done
fairly well in UK government bonds over the
same period but the difficult 2022 means you
now have about the same purchasing power
that you started with.
Another question we are asked is why not put
money in cash now and wait for a “better”
investment environment before putting the
money back into markets. This might sound
like an attractive strategy but it is extremely
difficult to do successfully. We believe in the
old adage that it is time in the market rather
than timing the market which is rewarding.
The benefit of a patient long-term disciplined
approach to investing is shown by looking at
the returns of the FTSE All-Share Index since
1986. If you had invested £10,000 in the
market 37 years ago, the compound return
would have given you £240,000 today. If
LIBOR 3m TR
£2.23
£1.01
£0.86
2003
Mising 30
Best Days
When were the 10 best days in the market?
20-year real returns: total return of £1 in real terms
FTSE 100 Net TR
£19,550
£0
2015
2017
2019
2021
you had missed the 10 best days of returns
over those 37 years, your money today would
be reduced from £240,000 to £124,159.
These are shown in the table above.
This figure starkly illustrates the impact of
missing just 10 days of returns over 37
years. The challenge is exacerbated by the
fact that the best days often come during
the periods of maximum pain so timing
them is extremely difficult. For example,
the best day of returns since 1986 was
on 24 November 2008 during the Global
Financial Crisis (GFC) and came just two
months after Lehman Brothers went bust.
The second best day was 24 March 2020,
which was the day after the UK went into
lockdown during Covid.
The seventh best day of performance over the
past 37 years was 21 October 1987, which
was two days after the Black Monday crash.
Three of the other four best days of performance
also followed soon after the collapse of Lehman
Brothers in September 2008. What these
strongest days for returns have in common is
that very few investors would have had the
bravery or conviction to invest at those times.
This is why the Liontrust Multi-Asset
team believes in a long-term robust and
repeatable investment process which
remains invested during the difficult times
and takes away some of the excesses
through holding a diversified portfolio of
different asset classes, including bonds.
2023
LIONTRUST VIEWS – AUTUMN
Source: Morningstar, 1 January 2003 to 31 July 2023.
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