Numbers In Different Formats tell Different Stories

Early in my professional career, I remember attending a conference held by the group and I remember quite vividly the chairman saying “there is a big difference between investment returns and investor returns.” Thinking back on that saying, what he was trying to say was it’s all well and good having 1st quartile performance over the last five years, but unless you’ve been invested for the full five years your experience might be very different.

Arguably, this could be one of the reasons why our investment approach is to try to find funds that deliver consistency. We want to be able to feel comfort in recommending funds for inclusion in a portfolio over the short, medium and longer-term. We don’t want to have excesses on one side or the other that account for the major element of returns for clients. We don’t want to actively buy a fund after a surprisingly strong recent set of numbers (because we all know that the odds of the fund continuing to have such strong numbers are not great). We also don’t want to sell an asset just before it goes off on a tear will leave us all asking “if only”.

But, this profession is all about numbers. It’s all about ratios. Therefore, this article can be used to show the same set of numbers in different ways. Whether you consider them good, bad or indifferent is completely down to your interpretation. We produce these numbers in these formats for lots of different indices, sectors and funds. We believe it gives us a good way to interrogate the output.

Time is also incredibly important when it comes to numbers. The interpretation of a one-year number for an index can mean something drastically different to the three, or five-year numbers and that can make looking at numbers really emotional too.

Numbers and ratios can be incredibly complex though as well as incredibly simple. One issue though is the fact that a number in isolation means nothing. A number in absolute form, or relative form can mean many different things. Therefore, for the rest of this piece, we’re going to focus on the FTSE All Share Index. An index that we should all know about. It’s an index that represents roughly 650 UK companies which predominantly focuses on the largest companies listed in the UK, although there are mid-cap and small cap representation. It is an aggregation of the FTSE 100, FTSE 250 and the FTSE Small Cap Indices and is market capitalisation weighted. It covers over 98% of the full capital value of companies that are eligible for inclusion.

With data running to 31/12/2018, here are some numbers representing the FTSE All Share Index (income reinvested, source Financial Express). After all, taking taxation, currency, income and other factors into consideration the returns you might see could potentially deliver a different set of numbers.

So, the index was down 9.47% for the last 12 months. Just saying -9.47% can conjure lots of images, but in isolation means nothing. Assume “Company A” made ï¿¡1bn profit in the most recent 12 months. Is that good or bad? If you know that in the 12 months to 12 months ago the previous profit was ï¿¡2bn, then the ï¿¡1bn doesn’t look too good. Alternatively if the previous profit figure was ï¿¡100m, then ï¿¡1bn looks very good indeed…

Therefore, let’s look at the -9.47% compared to a number of other indices / sectors / currencies / commodities…

The table above (sorted alphabetically) now brings lots of colour to the -9.47% number. If you ranked the numbers, that would bring more light to the proceedings, as per below.

In the table above which contains 57 different indices, the twelve month number registers 50th out of 57. Arguably not that good! But we’ve all heard of the saying “lies, damned lies and statistics” and looking at these numbers, once again, only show some of the data. For instance, are the other 56 suitable as comparators? Are there specifics forcing the FTSE All Share further down the league table (in the way it is created, calculated, rebalanced for instance?) Have external factors affected it (taxation or currency fluctuations?)

What about on a year-by-year basis? Was -9.47% “normal”? Below is a chart which might put 2018 into a different perspective…

The chart above looks back at annual returns in 5% chunks going back to 1986 (33 calendar years). As can be seen above, there have only been 8 negative years from the FTSE All Share, so arguably last year could have been seen to be an outlier, after all, the last time there was a negative year from this index was 2011.

What about Monthly, or quarterly?

The table above shows the returns (red is a negative return, green is positive) and 2018 showed eight negative months and three negative quarters. The last time there were three negative quarters was 2000 when the index lost 5.90% (although 2008 did have four when the market fell 29.93%). 2011 also had 8 negative months, but only one negative quarter and the year registered a 3.46% loss.

The final table for this piece is to look at the rolling 12 monthly returns in histogram form as highlighted below. This data (updated monthly) looks at the last 25 years (whereas the previous two tables look back 33 years (be mindful though a different starting point can certainly lead to a very different end point when it comes to investment returns or investor returns…) To make things a little easier from an interpretation perspective, the first date you can see (top left below) which is Oct-08 represents the 12 months to the end of October 2008 registered a return between -30% and -35%.

The table above shows that in the last 300 observations, 71 were negative which represents 23.67% of the count. Some other statistics from the data set above – the highest 12-month return was 52.30%; the lowest -34.36%. The average annual return was 8.84% (the median 11.47%).

Once again, used in isolation, numbers can be good, or bad. Used as comparison, they can be good or bad, used in absolute form, they can be good or bad. But, they can help tell a story – for good or bad. They can help “frame” an argument – also, for good or bad. This piece has not said (purposefully) anything about the “risks” associated with these numbers, and without it you don’t know the whole story. I’ll end this article though with a great quote attributed to Andrew Lang “people uses statistics as a drunk man uses lampposts – for support rather than illumination”.