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Understanding Good Investment Strategies
An Exercise in Analysis
Just recently a friend, whom is also a client, stated that his last valuation, of a long term retirement plan, which he contributes $1000USD each month, showed that he had invested $10,000USD and his valuation over the period was $10,900USD. He compared this to a return he obtained locally on $10,000USD capital invested which returned him $1,890USD in growth over the same period. I explained that like many investors he was dividing apples with oranges and they cannot be compared, except generically as fruit or investments. This is one of number of common problems, which consultants have to endure, even from Financial Directors and economists, whom one would assume, would and should, know better.
At the end of the 3rd Quarter 2003 Review , I gave an example a simple example of two cousins, one investing annually the other monthly and I promised to explain at a later date, why their actual returns were different.
The first mistake made by my friend, in the statement above is the comparison of type. It is true that on the day we spoke, he had invested $10,000US in each investment, but one investment had had $10,000US from day one, the other had only $1000US from day one and indeed his tenth $1000US had arrived only a few days before we had spoken. Let us use some examples where most of our clients are invested, to illustrate the mathematics.
If we use a low/medium fluctuation fund such as Generali International Global Managed USD Fund to illustrate the point…The fund is weighted to US equities, with an additional spread of Bonds and cash deposits…We see in the above charts that the fund between July 03 and June 04 increased in value from $3.01 to $3.35USD, an increase of 11.30% (NOTE: In reality the unit price on the 30th June 2004 had reached $3.38USD, however as we use these examples to illustrate a mathematical principle we shall continue to use the June unit price).
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| Generali International Managed USD Fund |
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Jul
03 |
Aug
03 |
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Oct
03 |
Nov
03 |
Dec
03 |
Jan
04 |
Feb
04 |
Mar
04 |
Apr
04 |
May
04 |
Jun
04 |
| 3.01 |
2.94 |
2.96 |
3.07 |
3.18 |
3.22 |
3.28 |
3.47 |
3.47 |
3.45 |
3.34 |
3.35 |
| 332.23 |
340.14 |
337.84 |
325.73 |
314.47 |
310.56 |
304.88 |
288.18 |
288.18 |
289.86 |
299.40 |
298.51 |
| Value after
1 year |
$12,495 |
Realised Growth |
4.13% |
Actual Fund
Growth |
11.30% |
Avrg Unit
Cost |
3.22 |
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Total
Units |
3729.97 |
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| Quarterly Payments |
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Jul-03 |
Oct-03 |
Jan-04 |
Apr-04 |
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3.01 |
3.07 |
3.28 |
3.45 |
3.19 |
Avrg Unit |
Cost |
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996.68 |
977.20 |
914.63 |
869.57 |
3758.08 |
Total Units |
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| Average |
unit cost |
3.19 |
Value after
1 year |
12589.55 |
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| Realised |
Growth |
4.91% |
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| Bi-Annual Payments |
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Jul-03 |
Jan-04 |
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3.01 |
3.28 |
3.14 |
Avrg Unit |
Cost |
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1993.36 |
1829.27 |
3822.62 |
Total |
Units |
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Average |
unit cost |
3.14 |
Value after
1 year |
12805.79 |
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Realised |
Growth |
6.71% |
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| Annual Payment |
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Jul-03 |
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Average |
unit cost |
3.01 |
Value after
1 year |
13355.48 |
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3.01 |
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Realised |
Growth |
11.30% |
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3986.71 |
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| GENERALI INTERNATIONAL MANAGED GLOBAL USD FUND |
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| $12,000USD |
TOTAL UNITS |
AVERAGE UNIT |
VALUE AT |
ACTUAL % |
VALUE AT |
ACTUAL % |
| INVESTED |
PURCHASED |
COST |
4TH JUN 04 |
GROWTH |
6TH JUL 04 |
GROWTH |
| Mensual |
3729,97 |
3,22 |
12495,40 |
4,13% |
12607,30 |
5,06% |
| Trimestral |
3758,08 |
3,19 |
12589,57 |
4,91% |
12702,31 |
5,85% |
| Semestral |
3822,62 |
3,14 |
12805,78 |
6,71% |
12920,46 |
7,67% |
| Anual |
3986.71 |
3.01 |
13355,48 |
11,30% |
13475,08 |
12,29% |
The chart below summaries the units purchased using the following methods $1000USD monthly, $3000USD quarterly, $6000USD half yearly and $12,000USD annually.
We see
from the above charts that those investing monthly purchased 3729.97 Units
at a Dollar cost/average price of $3.22USD, Quarterly averaged $3.19USD,
half yearly $3.14USD and Annually at a unit price of $3.01USD ( IE. The unit
price in June 03).
From the above it would seem that all investors should be have an annual
investment form, yet as we only have the statistic for one year, such a view
although understandable, is not proven in the context of mid to long term
capital appreciation investments. If we examine the fund since its
inception in November 1995 we find that its CAG ( Compound Annual % Growth
rate since launch) is 7.15%. If we delve further and analyse its performance
since July 2000 we find the following.
Four Years |
TOTAL UNITS |
AVERAGE UNIT |
VALUE AT |
ACTUAL % |
VALUE AT |
ACTUAL % |
From June 00 |
PURCHASED |
COST |
6TH JUN 04 |
GROWTH |
6TH JUL 04 |
GROWTH |
MONTHLY |
16498,32 |
2,97 |
55269,36 |
12,79% |
55764,31 |
13,80% |
QUARTERLY |
16943,52 |
3,01 |
56760,80 |
11,30% |
57269,10 |
12,29% |
HALF YEARLY |
17880,79 |
3,02 |
59900,66 |
10,93% |
60437,09 |
11,92% |
ANNUALLY |
19867,55 |
3.02 |
66556,29 |
10,93% |
67152,32 |
11,92% |
At first
glance the above chart indicates that throughout the turbulent period of
June 2000 to the present time, with events such as 9/11, the Enron and US
Fund Manager scandals, SARS, Iraq and oil prices etc., that those using
monthly investment programmes fared best with a $2.97USD AUC. The lowest
unit value during this period was $2.67USD Sept.02 and the highest was $3.47
in February 04. Therefore from this AUC we can determine a number of
assumptions. If it should fall back to the lowest point the accumulated fund
will shed 10.1% if it reaches it highest point, it will grow 16.8% from its
AUC value.
A glimpse
as the chart above shows the price trends. Contrary to popular belief, for
an investor, during the first five years, a trend downwards is really a
cause for celebration, rather than a trend upwards. However, as we have
historical evidence showing that all economies have cyclical ups and downs,
then the benefits associated with AUC values will always accrue. The graph
above shows that the quarterly, half yearly and annual investors seem to
have not performed quite as well. However, this too is not quite accurate. The chart above is a thumbprint view on the 6th June and 6th July 2004 which means that the view is somewhat unfair. Assuming that the 6th June 2000 was when four investments were instigated, then four years on the following will have been invested on the 6th June 2004…
| Four year invested |
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| Frequency |
USD |
| MONTHLY |
49,000 |
| QUARTERLY |
51,000 |
| ½ YEARLY |
54,000 |
| ANNUALLY |
60,000 |
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This
naturally distorts the analysis, if we extrapolate an analysis on the 5th June 2004 ( The day before the anniversary) we find that the monthly,
quarterly, half yearly and annual frequently totals invested to date would
be $48000US. This would impact on the AUC and provide the following results,
which still show the monthly ahead at 12.42%......
Four Years |
TOTAL UNITS |
AVERAGE UNIT |
VALUE AT |
ACTUAL % |
VALUE AT |
ACTUAL % |
From July 00 |
PURCHASED |
COST |
4TH JUN 04 |
GROWTH |
5TH JUL 04 |
GROWTH |
MONTHLY |
16107,38 |
2,98 |
53959,73 |
12,42% |
54442,95 |
13,42% |
QUARTERLY |
15994,67 |
3,00 |
53582,14 |
11,63% |
54061,98 |
12,63% |
HALF YEARLY |
16053,51 |
2,99 |
53779,26 |
12,04% |
54260,87 |
13,04% |
ANNUALLY |
16053,51 |
2,99 |
53779,26 |
12,04% |
54260,87 |
13,04% |
As stated
above this is a relatively low fluctuation fund, and we shall examine more
volatile funds later. Never the less the exercise above illustrates both the
basic general mathematics and why thumbprint analysis of the performance of
a fund must be assessed over a longer period and also that even this will be
effected, when one factors in the investment frequency.
The point
of the exercise is to demonstrate that many variables exist which must be
factored into the equation before we begin the analysis of not only, whether
a fund will perform to expectations within the prevailing and future
economical climate and whether accrued benefits to date will be enhanced or
negatively effected by another purchase of units. We must also assess what
percentage a fund is expected to gain over the years as part of either a
growth or performance portfolio selection.
Once these
basic details have been factored into the equation, we must then assess how
the prevailing economical climate will affect the performance of the fund.
The latter if a degree of commonsense is applied is often the easiest part
of the process. We shall examine this
exercise now.
Next: Is it
Champagne or Cider?
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