Ian Cowie: DIY investors have more freedom than fund managers

13th January 2022 08:32

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Our columnist draws comfort from interactive investor customers beating the professionals in 2021.

It’s never been easier for individual investors to beat the institutions, thanks to new technology and old-fashioned human nature, as demonstrated by interactive investor’s Private Investor Performance Index. Thousands of investors running our own money achieved average - or, more correctly, median - returns that were higher than professional fund managers last year.

To be precise, interactive investor’s clients obtained total returns of 13.8% during 2021, compared to 11% for the Investment Association (IA) - a unit trust trade body - Mixed Investment 40%-85% Shares sector. With nearly £55 billion assets, the data from Britain’s number one flat-fee investment platform represents a fair sample and a confidence-booster for anyone who favours a DIY approach to running our own life savings.

This won’t be popular with the financial services industry, which has a vested interest in promoting the myth of ‘star fund managers’, but the Private Investor Performance Index shows how amateur investors can - and often do - beat the professionals. It’s also reassuring for those of us in our second half-century because it demonstrates that age and experience can have value - with investors aged 65 or older achieving higher returns of 14.6% last year.

However, as you might expect, different pictures emerge if the data is examined over different periods. For example, younger investors aged between 18 and 24 achieved total returns of 22.8% over the two years the Private Investor Performance Index has been running, compared to 14.5% for interactive investor clients of all ages.

Better still, for those of us who favour investment trusts, younger people’s outperformance since 2020 seems to have been achieved because 34% of their assets were allocated to investment trusts, compared to an average of just under 23% for interactive investor clients of all ages. Investment trusts tend to do well in rising markets because – unlike open-ended fund or exchange-traded funds (ETFs) - they can ‘gear’ or borrow to invest, boosting returns, although it is important to remember this can also increase losses in falling markets where the cost of borrowing exceeds investment returns.

It is also noteworthy that DIY investors of all ages achieved higher median returns over the last two years than Britain’s leading stock market indices, with the FTSE All-Share delivering 6.7% and the FTSE 100 lagging with 4.8%.

Richard Wilson, chief executive of interactive investor, said: “It’s encouraging to see that our customers have managed to navigate the ongoing market uncertainty since the start of the pandemic in 2020. Over the 24 months of data collected, our younger investors have demonstrated a particularly impressive performance, helping to pave the way for their longer-term financial security.

“Now that we have two years of data, we have a much fuller picture of how our customers have been faring, and even thriving, in what have been challenging conditions for many.”

New technology has fundamentally shifted the balance in favour of individual investors. Analysis and information are now freely available from online investment platforms - such as the one you are reading now - that could only be obtained from business libraries when I began work as a City reporter on Fleet Street more than 35 years ago.

Meanwhile, human nature remains unchanged and many professional fund managers prefer to ‘follow the herd’ and ‘hug the index’ because this is safer than striking out on their own. That is understandable when their performance is constantly scrutinised, and they have boards of directors to report to every three months. I only have to keep Sue, my wife, happy.

More seriously, individual investors need not worry about short-term underperformance, so long as we achieve satisfactory medium to long-term returns. Good examples of both in my top 10 holdings by value include Polar Capital Technology (LSE:PCT) and Worldwide Healthcare (LSE:WWH) where one year’s returns have disappointed but performance over the last decade remains highly satisfactory.

More recently, allegations of genocide in China forced this investor in that country since the 1990s to sell up in 2020 to buy shares elsewhere in Asia. For a year or so that looked like an expensive outbreak of ethics for this DIY investor.

Since then, Fidelity China Special Situations (LSE:FCSS) - one of the investment trust shares I sold - has fallen by 22% over the last year, according to independent statisticians Morningstar. Meanwhile, Vietnam Enterprise (LSE:VEIL) - one of the investment trust shares I bought - has risen by 30%.

Few - if any - professional emerging markets fund managers can afford to shun China because it is such a major constituent of their sector. Similar constraints apply to institutional investors in many areas, while individual investors are free to follow our own conscience about how and where sustainable growth and income can be obtained.

The City of London is full of fund managers’ head offices in plate-glass palaces paid for by people who couldn’t be bothered to read the small print. But nobody else will ever care as much about our life savings as we should. The Private Investor Performance Index by interactive investor demonstrates that digital technology has empowered the DIY investor.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Polar Capital Technology (PCT), Vietnam Enterprise Investments (VEIL) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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