Monday, 25 July 2016


The new Minister for Pensions - as he will be called - was demoted before he even began his job.

Richard Harrington the MP for Watford was appointed to his post on Monday 18 July after the dismissal of his predecessor Baroness Altmann late the previous Friday.

Lady Altmann was a Minister of State, second in the ministerial pecking order below the Secretary of State and above the lowest rank of Parliamentary Under-Secretary. But Mr Harrington was put in that lowest rank. Above him are three Ministers of State - one for Employment, one for Disabled People, Work, and Health, and one for Welfare Reform - and the Secretary of State Damian Green. The only other Parliamentary Under-Secretary Caroline Nokes is Minister for Welfare Delivery, junior to the Minister of State for Welfare Reform.

Steve Webb, the previous Pensions Minister but one, was clear what this meant.

“an Undersecretary of State is junior to a Minister of State so it is a demotion for pensions. The seniority of ministers really does matter, not least in dealings with other government departments such as the Treasury. This…demotion for pensions sends a worrying signal.”

It is not just seniority Mr Harrington has lost. As a Minister of State in the Commons he would have been paid £9,305 a year more than he is as an Under-Secretary. He won't be poor. His total pay as an MP and a Minister will total £90,397. But that is 9% less than the £99,702 paid to his Minister of State colleagues in the House of Commons.

Lady Altmann has made it clear in newspaper articles and radio interviews since she left Government how tough it was for her even as a Minister of State to get her voice heard, still less effect any real policy change. An Under-Secretary will face an even bigger challenge.

But perhaps it doesn't matter. Unlike his two predecessors Mr Harrington has no apparent background in pensions or indeed social policy. I understand his job will be to continue with the implementation of existing policies rather than to introduce anything new or radical. A spokeswoman told me

"Pensions remain a key priority for the Government and the important work to bring in the new State Pension, roll-out automatic enrolment and safeguard the pension freedoms will continue under our new Minister for Pensions."

No date could be given for the new Pensions Bill which would make important changes to protect consumers, increase their freedom, and provide new ways to give them advice and guidance. But "it remains a priority and is expected in the Autumn". New Pensions Bill see p.30

On his appointment Richard Harrington is quoted as saying

"I am delighted to take responsibility for this important ministerial post, and I look forward to tackling the full range of state and private pension matters, including the new Bill and automatic enrolment, among so many others."

That will keep him busy.

Footnote: Under the three Labour governments 1997-2010 Pensions Ministers lasted in post on average for 14 months (426 days). The Coalition government benefited from having one Pensions Minister for its full five year term. Baroness Altmann also lasted in her job just 14 months (431 days). 

Footnote 2: The previous Pensions Minister, Baroness Altmann, was a member of the House of Lords. Ministers of State in the Lords receive the standard Minister of State pay in the House of Lords of £78,891 which has been frozen at that level since 2011. Peers do not get MP’s pay and Ministers are not allowed to claim the standard £300 per day for turning up which applies to other Lords. So in total the new Minister gets more than his predecessor, though the bulk of that for being an MP (£74,962) not a Minister (£15,435). See Minimum Wage Ministers.

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25 July 2016

Sunday, 24 July 2016


Thirty junior Ministers in Theresa May’s Government earn barely the minimum wage for their ministerial duties. Just £15,435 a year which is £7.42 an hour for a 40 hour week.

The lowest rank on the Ministerial ladder is the Parliamentary Under-Secretary. Above them are Ministers of State and at the top in charge of the Department is the Secretary of State who also attends Cabinet.

A Minister’s pay comes in two parts. 

First, they are paid as an MP. That salary is determined now by the Independent Parliamentary Standards Authority (IPSA). Currently that it is £74,962, a rise of £962 on the £74,000 paid to MPs returned at the 2015 General Election. 

Second, they are paid as a Minister. The Government no longer publishes a list of Ministerial Pay. The House of Commons, IPSA, the Cabinet Office, and Downing Street, all told me they did not know what Ministers were paid. Eventually I was sent a list of Ministers’ salaries in Regulations dated 14 July 2011. Since then, I was told, Ministers’ pay had been frozen.

But the amounts in the Regulations were clearly not right. It then turned out that when David Cameron froze Ministers’ pay he froze the total, including the MPs’ pay. So as MPs’ pay rose each year the extra paid to a minister was cut. In 2011 a Cabinet Minister was paid £68,827 on top of their pay as an MP of £65,738. A total of £134,565. But year by year as their pay as an MP rose the extra paid as a Minister was frozen leaving them with same total. When their pay as an MP rose to £74,000 in April 2015 their pay as a Cabinet Minister fell to £60,565. That is a cut in their Ministerial pay alone of 12%.

That offsetting ended in April this year. So when MPs’ pay rose by 1.3% in line with overall public sector pay to a total of £74,962 the pay as a Cabinet Minister stayed fixed at £60,565. So the total now is £135,527. That figure was confirmed to me by the House of Commons but no one could say what junior ministers was paid.

Applying the same arithmetic and the 2011 Regulations it turns out that a Minister of State is paid £24,740 on top of their MP’s salary and a Parliamentary Under-Secretary gets just £15,435 for their ministerial duties on top of their MP’s pay. If they work 40 hours a week on purely ministerial duties then they are being paid £7.42 an hour for doing them, barely above the National Living Wage of £7.20 an hour.

The total of £90,397 paid to a Parliamentary Under-Secretary is, or course, a very high income. By itself it would put a Minister without a family among the richest 1% of the population. But 61% of that population has a total income higher than the amount Ministers are paid for their Ministerial work.

The history of Ministers' pay is complex. After he became Prime Minister in June 2007 Gordon Brown decreed that Ministers would not take available pay rises and their pay was frozen in 2008/9, 2009/10 and 2010/11. So even though available pay was higher Ministers did not take it, keeping the pay that was set on 1 November 2007 plus the MP's pay set on 1 April 2008. 

After the 2010 election David Cameron went further and announced a 5% cut in Ministers' pay. The 5% was calculated from the amounts Labour Ministers had taken. He also followed Gordon Brown - who had cut his pay by £25,000 - and reduced his own pay to around £8000 more than a Cabinet Minister. It is those amounts which are set out in the 2011 Regulations.

On 1 April 2010 the total actually paid to a Parliamentary Under-Secretary was £94,142 comprising £63,291 as an MP and £30,851 as PUS. Today’s Parliamentary Under-Secretary gets half the pay as a Minister and £3,745 (4%) less in total.

Ministers in the House of Lords have their own pay scale as they do not get paid as an MP. These were also set out in the 2011 Regulations. It sets pay for a Cabinet member in the Lords at £101,038, a Minister of State at £78,891, and a Parliamentary Under-Secretary at £68,710. These amounts have been frozen since then and are still paid at those levels.

Peers can claim a tax free allowance of £300 for each day they attend the House of Lords. But Ministers and others who are paid a salary for their duties there cannot claim this daily allowance. The House of Lords sits on average for 150 days a year. So an assiduous Lord who attended every sitting day could claim £45,000 which is equivalent to earning £64,712 before tax. Ministers do attend frequently and the extra they get as a Minister on top of the allowance they could claim as non-Ministers is probably less than their Commons equivalents.

More information

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25 July 2016

Monday, 11 July 2016



There is no doubt that the FTSE 250 index has fallen following the vote to leave the EU on 23 June announced on 24 June (Brexit).

Many people – mainly it seems those who voted Leave – have been questioning this analysis. They are wrong. Of course there are dates you can pick which show the FTSE250 lower in the past than it was after the Brexit vote. But not many.

This analysis compares the FTSE250 post Brexit with previous months before the vote was announced on 24 June 2016.

It compares the previous run of the FTSE 250 with two figures for the Brexit level of the FTSE250.
  • The average closing price from 24 June 2016 to 8 July 2016 – the Brexit mean.
  • The closing price on Friday 8 July 2016, two weeks after the Brexit vote was announced.

The Brexit mean of the 11 closing prices from 24 June 2016 to 8 July 2016 was 15899.66.

Over the previous year – 24 June 2015 to 23 June 2016 the FTSE 250 closed higher than that on 241 out of 250 occasions (96.4%) and closed lower on 9 occasions (3.6%).

The Brexit mean was
  • 5.4% lower than the average from the day the vote was called (19 February 2016) to the day before the vote (23 June 2016).
  • 4.4% lower than the average from 1 January 2016 to that date.
  • 6.1% lower than the average over 12 months from 24 June 2015 to 23 June 2016.

The closing price on 8 July 2016 was 16177.8.

Over the pre-Brexit year – 24 June 2015 to 23 June 2016 the FTSE 250 closed higher than that on 229 out of 250 occasions (91.6%) and closed lower on 21 occasions (8.4%).

The closing price on Friday 8 July 2016 was
  • 3.7% lower than the average from the day the vote was called (19 February 2016) to the day before the vote (23 June 2016).
  • 2.7% lower than the average from 1 January 2016 to that date.
  • 4.5% lower than the average over 12 months from 24 June 2015 to 23 June 2016.

Of course this effect may disappear in weeks or months. But the immediate effect on the FTSE 250 index of share prices in mainly UK medium sized companies is clear and unarguable.

Why the FTSE 250?
The FTSE 250 is a better indicator of the effect of Brexit on UK companies than the FTSE 100. The FTSE 250 index measures the share prices of the 250 companies ranked under the FTSE 100 in size. The FTSE 100 contains mainly overseas companies with foreign earnings. They of course have benefited from the fall of 10% or more in the pound against all other major currencies including the US dollar and the euro. The FTSE 250 comprises mainly UK based companies trading in Sterling.

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10 July 2016

Tuesday, 14 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.

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. 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. 

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 (which was 20% on interest throughout this period) 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.

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.
Read the full research also on this blog.

Paul Lewis
15 June 2016


The purpose of this research is to see if cash or shares give the better return over periods of investment from one to twenty years.

Most advisers would agree that over the long-term shares are the better place for money. And most would also agree that over the short-term cash is safer. But where is the time boundary between that advantage of shares over cash? Advisers often call five or ten years ‘long-term’. But there can be substantial risk of losing money over that sort of period. So where is the advantage boundary between cash and shares?

This research seeks to set parameters.

Read the Press Release which summarizes the findings.

Shares are represented by a real FTSE 100 tracker from HSBC. Chosen as a typical tracker – not cheap, not expensive, and accurate. Data from Morningstar. The numbers are the total return with dividends reinvested and after charges. It is assumed that once invested the money is left untouched to the end of the period at which time it is encashed.

Cash is represented by best buy one year bank or building society deposit accounts – referred to as ‘one-year bonds’. The data is taken from MoneyFacts Savings Selection and was collected from original copies of the MoneyFacts periodical which is published each month. One year bonds are used in the analysis as what I call ‘active cash’. On each anniversary of the investment the bond is cashed in and then reinvested in the current best buy one-year bond. In the real world there would be a time lag between encashing and having the money available for reinvestment. This point is dealt with later.

All datasets are of prices on the first of the month. Morningstar data is for the closing price on the date. It has been normalised to begin at £10,000 in 1 January 1995. MoneyFacts is published once a month and the data is for best buys a few days earlier, just before the start of the month of publication. This slight date difference is considered immaterial.

The datasets run for 21 years from 1 January 1995 to 1 January 2016. For each time period of 1 to 20 years within the dataset the growth in cash (as defined) and shares (as defined) was calculated.

Let us take a five-year period for example. The calculation is of the growth in the investment over five years from an investment made on the first of a month. So a five-year period runs for example from 1 October 1999 to 1 October 2004. Twenty-one years of data is used from 1 January 1995 to 1 January 2016. Over that period of 21 years there are thus 16x12=192 possible investment periods. It is assumed that the investment is opened on day one and cashed in on the anniversary at the end of the period.

For each of the periods the growth is calculated for the tracker and for the cash. The two growth values are compared to see if tracker or cash gives the higher growth over that period. No deduction is made for tax on interest or dividends. That approximation is explained later. For each five-year period the spreadsheet counts the occasions when (a) cash or (b) shares gave higher growth. It also counts those periods in which the money in the tracker ends up less than it started.

All calculations and data are nominal – no account is taken of inflation which affects cash and tracker funds equally. Whatever measure of inflation was used it would not affect whether cash or shares gave the higher return.

The results are shown in the table

Active cash vs FTSE 100 tracker 1/1/95-1/1/2016

Cash better
109 periods.
57% of 192 periods
Shares better
83 periods.
43% of 192 periods
Shares LOSE money
46 periods.
24% of 192 periods

The table shows that for periods starting 1 January 1995 to 1 December 2010 a five-year investment in cash or shares (as defined) started on the first day of a randomly chosen month would yield a better return in cash more often than one in shares.

Investing in shares carries another risk – losing money. In 46 out of the 192 five-year periods (24%) the tracker would lose money, ending lower than it started. Cash never loses money within the Financial Services Compensation Scheme limit – currently £75,000. Above that limit there is of course a risk that the savings institution will collapse and some or all of the capital lost. Large sums can be protected if they are spread among several institutions keeping the money in each at £75,000 or below. That will reduce the interest earned as by definition not all can be in the best buy account. But the difference between the top 5 one year bonds is not that great and would not affect the overall balance between cash and shares. Further analysis assuming start dates throughout the month shows the same risk of loss with shares. Any day start: 23.82% end lower. First of month start: 23.96% end lower.

Over the 21 years from January 1995 to January 2016 the overall return for shares is 6.0% per year compound. For active cash the overall return is 5.0% per year compound. The 1.0% difference is significantly lower than the 3%-8% often quoted for the so-called ‘risk premium’ of investing in shares.

Further analysis of the five-year periods
On those occasions when shares win the gain is more than the occasions on which cash wins. Overall for the 192 five-year periods when shares beat cash they make an average return of 10.4% a year while cash when a winner makes just 5.5%. But of course when shares lose they can also lose money, as the graph shows. It also illustrates that it take a good couple of years from shares to recover from a serious fall. These falls should not be seen as exceptional – they are quite common.

In the 109 periods when cash beats shares investors had to wait an average of 23 months (median 19 months) before an investment in shares would again win. And in the 46 periods when shares produced a negative return it took as much as 42 months and as little as one period for that to be reversed. An average of 19.7 months (median 19.5). So when shares fail to perform there may be a long wait before investing in them is advisable again. But all that speaks to is when judgement might be exercised in share investments. This research is not about that. It is a comparison of using two simple rules – choose a low cost tracker vs use one year active cash. 


If the interest on cash had been taxed at the current basic rate then over five years the figures are closer but the balance is still in favour of cash. Shares win in 47% (91) of the 192 periods, cash wins in 53% (101). For higher rate taxpayers the calculation is more difficult as tax would also be due on dividends which would affect the comparison. Data to do that calculation is not available and is not done.

Basic rate tax is not a consideration for cash interest on ISAs or cash in pension funds as no tax is charged on it. Note that the figures used here are not the rates for ISAs or for funds which can be SIPPed which may be different from those used. Such rates are not available historically over this period.

Looking ahead from 6 April 2016 the Government estimates that 95% of cash savers do not pay tax on the interest because the first £1000 of interest earned is tax free (first £500 for higher rate taxpayers). So comparing untaxed cash returns with dividends is fair for the future.

Time lag
Active cash means taking out a one-year bond and then reinvesting the money at the best buy rate when it expires. In the past there would be a delay between the end of the bond and the money being available for reinvestment. Typically that might be up to two weeks. Modelling that is difficult. One approximation is to assume interest rates are 50/52 of the recorded rate. Doing that does not affect the balance of shares vs cash which still wins in 109 out of 192 periods.

The money taken by managers from a tracker fund as charges has fallen over the years. Today the charge on the HSBC tracker used is 0.18%. In the past it would have been more.

Summary of five year periods
Over the survey period January 1995 to January 2016, five-year investments begun on the first of each month in active cash beat a FTSE100 shares tracker in 57% of 192 periods.

Over the survey period January 1995 to January 2016, five-year investments begun on the first of each month in a FTSE 100 tracker ended the period lower than they started in 46 out of 192 periods (24%). That is almost a one in four chance of losing money. Cash, within Financial Services Compensation Scheme limits, will never lose money.

The table below gives the results for periods from 5 to 10 years. Cash wins over 5 to 9 years with an even split over ten years.

Active cash vs FTSE 100 tracker 1/1/95-1/1/2016

5 years
6 years
7 years
8 years
9 years
10 years
Shares better
83 periods
43% of 192 periods
67 periods
37% of 180 periods
50 periods
30% of 168 periods
57 periods
37% of 156 periods
52 periods
36% of 144 periods
66 periods
50% of 132 periods
Cash better
109 periods
113 periods
118 periods
99 periods
92 periods
66 periods
Shares LOSE money
46 periods
35 periods
13 periods
12 periods
14 periods
15 periods

Over longer and shorter periods than that the results are surprising.

Active cash vs FTSE 100 tracker 1/1/95-1/1/2016

1 year
2 years
3 years
4 years
Shares better
155 periods
65% of 240 periods
140 periods
61% of 228 periods
125 periods
58% of 216 periods
50% of 204 periods
Cash better
85 periods
88 periods
118 periods
101 periods
Shares LOSE money
64 periods
64 periods
71 periods
60 periods

Shares win over 1, 2, and 3 years; cash and shares win equal times for 4 years. Over periods longer than 10 years cash continues to dominate.

Active cash vs FTSE 100 tracker 1/1/95-1/1/2016

11 years
12 years
13 years
14 years
15 years
Shares better
58 periods
48% of 120 periods
44 periods
41% of 108 periods
23 periods
24% of 96 periods
3 periods
4% of 84 periods
4 periods
6% of 72 periods
Cash better
62 periods
64 periods
73 periods
81 periods
68 periods
Shares LOSE money
8 periods
0 periods
0 periods
0 periods
0 periods

Active cash vs FTSE 100 tracker 1/1/95-1/1/2016

16 years
17 years
18 years
19 years
20 years
Shares better
7 periods
12% of 60 periods
18 periods
38% of 48 periods
29 periods
81% of 36 periods
21 periods
88% of 24 periods
12 periods
100% of 12 periods
Cash better
53 periods
30 periods
7 periods
3 periods
0 periods
Shares LOSE money
0 periods
0 periods
0 periods
0 periods
0 periods

Cash wins over investment periods from 11 to 17 years, and among them from 13 to 16 years cash absolutely takes over. Over 14 year periods cash wins in 96% of the periods, shares in just 4%. In periods of 18 to 20 years shares win comprehensively with shares doing better in 100% of the twelve 20 year periods. Sample sizes get smaller as durations lengthen and are therefore less reliable.

For investment periods from 1 to 11 years there are always some starting dates when an investment in shares finishes lower than it started. For periods of 1 to 4 years it is always over 25%, peaking at 33% for three year periods. For 11 year periods it is 7% - one in 14. For investment periods from 12 years onwards the tracker always ends higher than it started.

These tables are depicted in the graph below.

Starting date
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.

Total winner
Adding all the data for all investment periods from one to twenty years cash wins in 55.7% of the 2520 periods and shares in 44.3% of them. Overall cash beat shares.

21 Years
Over the whole 21 year period the tracker out-performs cash. £10,000 invested in a tracker on 1/1/1995 becomes £34,098 by December 2015, a compound growth rate of 6.0% a year. Cash achieves nearly £6000 less finishing at £28,105, a compound growth rate of 5.0%. But the low difference between the risk free cash and the risky shares is striking. Bodie (Financial Analysts Journal May-June 1995 pp. 18-22) finds that the risk of investing in shares does not diminish as time invested lengthens.

The data presented here allow the boundary between cash and shares to be set at around 18 years. Less than that there is a better than evens risk that a shares tracker will produce a lower return than a series of best buy cash accounts. For periods below 12 years there is also a risk that a shares investment will lose money. Overall, for a random date and a random investment period the safer bet is active cash rather than tracker shares.

Tracker choice
I wanted to use a typical FTSE100 tracker that was not low or high cost and might have been picked by an unskilled investor in 1995 for which data was available. MorningStar provided the HSBC FTSE 100 Index Retail Income which fits that description and is used for this analysis. Other trackers are available of course. The five-year analysis has been repeated using HSBC FTSE 100 Index Retail Accumulation, the Marks & Spencer UK [FTSE] 100 Comp Acc, the HSBC FTSE 250 Index C Acc, and the All Share tracker M&G Index tracker A Acc.

The data are not available over the same period and have been taken from 1 March 1998 to 1 April 2016. The results from the FTSE100 trackers are almost identical with the data here. The FTSE All Share tracker shows a similar result with cash beating it in 53% of five-year periods. However, the FTSE 250 tracker has the opposite result with shares beating cash in 65% of periods. The FTSE 250 has shown particular growth recently. However, it would not have been a choice in 1995.

Another exercise using just the HSBC Acc and the M&S Acc FTSE 100 trackers from 1 January 1996 (the longest run of data available for the two) showed that over five-year periods the HSBC Acc produced a 57:43 split in favour of cash and the M&S Acc tracker showed 55:45 in favour of cash.

Of course with hindsight there will always be trackers which do better and others which would do worse. This research was not designed to do that study. It was designed to compare a typical tracker which would be chosen in 1995 over subsequent five-year periods. At that time the FTSE100 would have been the obvious choices. The figures show that the exact tracker of this type which was used does not affect the overall conclusions.

Linked periods
The periods used are not of course independent of one another as they overlap. That raises statistical problems with considering the significance of the differences. But the research was not designed to look for that. It simply says ‘if over the last 21 years I was to stick a pin in a date for an investment and then pick the investment period x, which would give me the better return, active cash or passive tracker?’ Chances are over almost all values of x it would be cash. And for all value of x<12 there is a chance of losing money in a tracker.

It also emphasises the importance of when the series starts. That is reflected in the fact that the periods when cash or shares win tend to come not at random but in blocks. The overwhelming advantage of cash over 14 years reflects the dates on which share price collapses and interest rate cuts fall.

Other studies
This research gives different results to every other study of shares vs cash. They universally state that shares do better than cash over every long-term period. The biggest and best known research is published as the annual Barclays Equity Gilt Study (BEGS). Now in its 61st year it now covers periods from 1899. The results of the latest 2016 study are unequivocal in showing cash bottom of investment classes and, by deducting inflation, giving negative real terms returns.

Shares: The BEGS however overstates the return on shares. It uses its own total return index which records the growth of UK shares with dividends reinvested. But it does not include the impact of charges so the stated growth would not be achieved by any real investor. Charges can cost 1% or 2% a year. Even a modern tracker or ETF makes some annual charge which can be 0.5% or more, though many are less. Other charges for buying and selling shares for example are not openly stated but affect returns. Any annual charge has a profound effect over the longer term. One of the authors of the report explained to me why charges are not included in its indexes “trends in transaction costs may have varied significantly over time. It is difficult to ascertain a history of a representative transaction costs.”

My research uses a real tracker – the HSBC FTSE 100 Index Retail Inc – so represents real returns after charges. It was chosen as a typical FTSE tracker for which data were available over a 21 year period. They are rare.

A comparison of the returns on the BEGS index and the tracker used in this study from 1995 to 2015 shows that the BEGS index grows 336.80% which is compound growth over the 21 years of 7.3%. My real tracker grows 240.98% which is compound growth of 6.0%. That 1.3% advantage of the BEGS study reflects the difference between a proprietary calculated index without charges and the real world returns on a named FTSE100 tracker.

Cash: The BEGS understates the return on cash. For its analyses it uses using a cash surrogate – three month Treasury Bills and for the annual figures uses the return on four successive three-month bills. That data shows compound growth over 21 years from 1995-2015 of 3.9%. The 2015 return on Treasury Bills is 0.45%. In January 2016 the best buy instant access savings account paid 1.65% and the Bank of England average over the 12 months to 1 January 2016 was 0.47%.

For comparison the BEGS 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 currently pays interest of just 0.25% a year.

Since 1998 the BEGS has also used a now closed Nationwide postal account – Nationwide Invest Direct – which currently pays 0.25%. In past years the rate it has used has been more competitive and for some years was better than the Bank of England recorded average. But since 2008 that has not been the case. This new data show that the rate used by BEGS has consistently been lower than the best buy rates for instant access accounts recorded by MoneyFacts. Both are well in excess of the BEGS rate of 0.25%. Over the 21 years the average rates are BoE 1.59%, BEGS 2.67%, MF best buys 4.51%. Clearly using the MF best buys on instant access would make a significant difference to the returns on cash over the period. This study uses one year bond rates as part of the Active Cash model explained above. They are normally higher than instant access rates.

One of the BEGS authors tells me

“We refer to 3 month Treasury Bills as “cash” for both the US and UK. We provide UK building society data as well in order to provide an alternative measure of cash returns. We used to follow Halifax returns but since that was converted to a bank, we chose Nationwide as one of the last remaining large building societies. The source for “best buys” will change over time and may come with differing conditions such as investment amount, or holding period. Again, our aim here is to provide a consistent long run series, a measure of cash returns over a 100 years, so we use the Treasury bills.”

BEGS is correct that over the long run it would be difficult to ascertain either investment charges or real cash data. But by ignoring charges and failing to use a better version of cash the study inevitably exaggerates the real returns on shares and understates the returns on best buy active cash.

Past and future
In general the past in investment is no guide to the future. A fund which has performed well in the past does not help us decide if it will perform well in future. Indeed, costs are the key determiner of which funds do best in the long-term – the lower the cost the better. The FSA (as was) found that poor past performance did tend to persist, but good did not.

This study is not bound by that general investment rule. Over the 21 years it covers there has been great variety in both share price changes and cash returns. There is no reason to believe that will be different in the future. The safest assumption for conclusions is that the 21 year study – a period chosen simply on the availability of data – is typical and would be reflected in the future. That is because it is driven by analysis of objective data which does not arise directly from human judgements. In that sense it is more physics than investment and uses the assumption that we occupy no special place or time. What was true will be true. At least that is the safest assumption.

Data from the BEGS confirms that the period 1995 to 2015 is not that different from the whole period from 1899 to 2015. For example, over the long run there is a significant percentage of investment periods when cash outperforms shares. The proportion identified is clearly less than the present study due to the overstatement of share returns and the understatement of cash returns. But for example from 1899 to 2015 30% of three year investment periods showed a higher return for cash. From 1995 to 2015 that percentage was 33%. Similarly cash won in 25% of investment periods of five years from 1899-2015 compared with 29% from 1995 to 2015. Those figures do not imply that the period 1995 to 2015 is anything special. Taking the available data from the table below cash outperforms shares in 21% of periods 1899-2015 and 23% 1995-2015.

Over n years

1. BEGS figure 8.1 p.61 cash = 4x3 month Treasury Bills; shares = own total return index
2. BEGS email to me 9 June 2016;
3. Paul Lewis research. Cash = Active Cash. shares = HSBC FTSE100 tracker.

Read the original Press Release

Paul Lewis
15 June 2016