Wednesday 2 April 2014

2013/14 Performance - Review of Benchmarks

Times change - and so do markets. What worked as an investment strategy last year may not be so effective in the coming year.

One way of keeping up with the evolution of financial markets is to look at the pattern of benchmark performance. However, driving by looking at your rear-view mirror is not a recipe for success...

 The DIY Income Investor portfolio has had a total return of just under 20% in 2013/14. Not too shabby, although far from a stellar performance, coming on the heels of a more impressive 33% return in 2012 and 30% in 2012/13 - but similar to the 20% return in 2013. More interesting is how this compares with other 'income investing' benchmarks - or the general market for that matter.

With every 'buy' and 'sell' the portfolio is exposed for all to see,  the point being that this imposes a harsh discipline on investment decisions. What worked - and what didn't? And should the strategy be modified for the coming months?

Inflation and Cash

One basic objective of investing in the stock market is to beat inflation - so that you don't end up poorer in 'real', inflation-adjusted terms. The latest CPI inflation rate (February 2014) is 1.7% - the rate has been slowly falling from 2.8% a year ago.

Most easy-access bank accounts pay interest less than this - for that reason I hold a lot of cash in long-term savings accounts and Ratesetter peer-to-peer lending on 5-year loans (currently earning 5.7%). Taking account of current accounts, easy-access and long-term savings, I am earning around 4.4% on cash. So far, so good.

[I don't include these cash savings in the DIY Income Investor portfolio.]

The Portfolio 

To recall, the DIY Income Investor portfolio is made up of high-yield securities, split more-or-less equally between dividend shares and fixed-income. Most of these are held as individual securities but over the year the proportion of these types of securities held in Exchange Traded Funds has been increased to around 31% - hopefully reducing specific security risks (because of the inherent diversification) but also reducing the potential yields. The focus of the portfolio is still the London Stock Exchange - but the ETFs have been introducing some geographic and currency diversification.

The Benchmarks

The appropriate benchmarks for total return (i.e. including income) might be those related to Exchange Traded Funds that specialise in these types of income-producing assets - as well as the wider financial markets.

UK shares:

UK dividend shares:

UK fixed-income:

And how are the international benchmarks doing? My international ETFs have performed as followed over the year:

For a US perspective, I have quoted The Capital Spectator before - here is his March 2014 summary:


Analysis of Performance

What can we take away from this blizzard of numbers?

First, the pattern of the ETF benchmarks highlight the continuing poor performance of fixed-income compared with dividend shares - all around the world, 2013/14 was not a good year to hold fixed-income securities. What is more, Emerging Markets have continued to perform poorly - in fact the best returns seem to have been in developed market equities. In particular, Euro-denominated dividend shares have provided the best total returns (at least for a UK investor - currency fluctuations probably play a role here). US Russell 3000 shares and the LSE FTSE 250 have also performed very well.

What is interesting, perhaps, is that although the portfolio contains 50% fixed-income, the overall performance has been much better than the overall return of the FTSE 100 (in fact closer to that of the FTSE 250) - but obviously the return has been lower than a portfolio of only dividend shares.

The pattern discussed in my previous post on these US benchmarks has continued: US stocks (shares) have continued their good run, followed by those of developed market economies. Junk bonds have just about held their own - but any other fixed-income has been a disappointment.

So, basically, the DIY Income Investor portfolio is just in line with western stock markets and the fixed-income portion - as well as the investments in Emerging Markets - have been a drag on performance. In other words, a simple FTSE 250 tracker would have done just as well.

However, sticking with this one tracker might not work over the next 12 months. The Market twists and turns in ways that are difficult - if not impossible - to foresee: you need to hedge your bets.

Strategy for 2014/15

My guess is that the key factors affecting 2014/15 are likely to continue to be the unwinding of QE in the US and elsewhere, the recovery of the Eurozone and continuing uncertainty about the recovery of Emerging Markets. I'm afraid that the US stock market looks like it is heading for a major correction.

Most experienced investors will stick with a strategy that they have thought through (assuming that they have actually thought it through) - but may allow a few tweaks around the edges. For me, the emphasis on high-yield remains, as does the split between dividend shares and fixed-income (times change, after all - and some years are going to be bad for both). Diversification is key, of course, with no single investment making up more than 5% of the portfolio.

Investment decisions for the DIY Income Investor portfolio are based on yield (plus trying not to actively lose money with overly risky investments). The highest current ETF yield in my portfolio is IHYG (iShares Euro High Yield Corporate Bond UCITS ETF) at 5.9%. That is closely followed by EMDV (SPDR S&P Emerging Markets Dividend UCITS ETF) at 5.8%. The yields on both of these ETFs have fallen in the last three months (meaning that their value has increased) and my guess is that both of these areas will continue to improve in value.

In addition, I plan to continue to increase the range of ETFs that are held, as well as to increase the proportion of the portfolio held this way.  (The longer term objective is to make the 'portfolio' - in fact a number of individual portfolios - easier to manage.)

Good luck for the coming financial year!

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Very similar selection of ETFs to mine, though I have far less in fixed interest. Like you, I continue to increase diversification via ETFs and ITs until I have at least 30% non-UK. In it for the long term I tend not to worry so much about the capital value, though I'm interested in your strategy of selling when the profit reaches 5 years dividends.
    I prefer to stick with RPI rather than CPI. As far as I remember, the CPI was a measure agreed in the EU that strips out certain 'local' increases in order to compare countries more easily, and is not a true measure of inflation as felt by someone who actually lives here.
    Keep the posts coming!

  2. I can see how you get an average return of 20% in 2013 with a mixture of postive and negative returns with the max being 28.6% and each holding being no more than 5% of total. What am I mssing?

    1. Hi Robert,

      There have been a number of quite positive sales over the year (check the blog posts) - plus the 5%-odd income: this is total return.

  3. Thanks. What tool do you use to reserach and compare ETFs. My portfolio has been trying to go for capital growth over the last 5-10years via managed funds, Did well until emerging downturn last July. But I need to move to an income model in the comming years, and keen to do some research of omy own to see if this is a better route going forward.

    1. Hi Robert

      ETFs are a bit tricky - I use Bloomberg's yield numbers plus look at the operator's website. TopYields gives some of the dividend high-yielders but not the fixed-income.

  4. Ignore my last post, I am digging through some more of your pages