Shares versus cash: which has made the best returns since 1995?

stock-market-graph-with-glasses-and-coins

Saving in best buy cash accounts has beaten a FTSE 100 tracker the majority of the time since 1995.

The finding was unearthed by Paul Lewis, the BBC Moneybox presenter. He compared the returns of the top-paying one-year cash account with a passive fund, which simply mirrors the up-and-down movements of the FTSE 100 index.

Lewis looked a 20-year period, the start of 1995 to the end of 2015, while the tracker fund chosen was the HSBC FTSE 100 index.

His research found that 'active cash', a savvy saver who switches to the best buy one-year cash account each year, beat the tracker fund 57 per cent of the time over five-year periods.

BIG GAPS IN PERFORMANCE

Lewis notes that for some longer time periods the gap was bigger. As an example, he says, over 84 rolling 14-year periods cash beat the tracker 96 per cent of the time.

'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,' says Lewis.

'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 10 years the chance of losing money was around one in 10. Few advisers know those odds, still less inform their clients of them.'

But how do the best buy cash accounts fare against active funds over the period?

Figures from broker Hargreaves Lansdown found that when measuring annual compound returns over the period, the average active fund that buys UK-listed shares beat active cash.

Fund/IndexAnnual compound return 1995-2016 (%)
Neil Woodford (after charges)12.6
Average UK stock market fund (after charges)7.8
FTSE All Share (no charges applied)7.5
FTSE 100 (no charges applied7
HSBC FTSE 100 tracker (after charges)5.9
Active cash5

ACTIVE FUNDS BEAT ACTIVE CASH

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: 'There are some seriously talented active managers investing in the UK who have consistently delivered returns above the UK stock market, after charges have been deducted.'

He adds that active cash is also difficult to achieve, and is not representative of the average saver.

'While in theory we should all be moving our cash from best buy to best buy, in practice this is difficult to achieve and requires an unrelenting drive and efficiency which few of us possess,' says Khalaf.

Whilst Annabel Brodie-Smith, communications director at the Association of Investment Companies, agrees it is important to have a balanced portfolio that includes cash, she points to the outperformance of investment trusts against cash being even more stark than for open-ended funds.

'The average investment company has outperformed cash (as well as the FTSE 100) by a substantial margin over three, five, 10, 15 and 21 years,' she says.

'Whilst we would agree that five years should not be considered long term, and equity investors should have a longer-term time horizon in mind, the average investment company is up 40 per cent over five years, compared to 25 per cent for the FTSE 100 and just 2 per cent for the average high interest cash account.

'The average UK all companies investment trust has performed even better, and is up 64 per cent.


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