PRESS RELEASE 15 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.
That is the shock finding of new
research using best-buy cash data which has never been available before.
The results challenge the
traditional view that putting money in a savings account is the poor relation
of investing in shares.
The analysis also 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 year
into 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 with the interest earned.
It found that money put into this
‘active cash’ beat the total returns on the tracker in 57% of the 192 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 financial
journalist and presenter of Radio 4’s Money Box programme Paul Lewis. He gained
access to 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.”
The new analysis produces different
results for three reasons.
- It uses a real tracker fund so the gains or
losses are after all charges
- It uses new data on best buy cash accounts
which has never before been collated and
- It moves savings once a year into the
latest best buy – what Lewis calls ‘active cash’.
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 earlier dates 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.
NOTES
TO EDITORS
Comparison
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.
Shares
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. So that 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.
Cash
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.
Tax
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 (which was 20% on interest throughout this period) cash still beats shares in the
majority of time periods, though the effect is smaller.
Inflation
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.
Other
research
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 1st 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.
Further
information
This is the original press release as issued to the press and some others on 13 June 2016.
Paul Lewis
15 June 2016