Review of 2015

It is traditional at the start of a new year for investment houses to produce reviews of the year that has ended, and the usual form is to discuss major events in politics, markets and the economy. Reviews of this kind are also freely available online, with examples including the BBC’s business review, the more technical global market overview from Towers Watson and The Economist’s market outlook.

These reviews are interesting, but they inevitably focus on short-term events. How relevant are they for our clients, who generally have long-term financial plans and long-term investment strategies to match? Our view is that the events of 2015 make a difference only if they provide grounds for changing the long-term plan. Since plans are based on long-term expectations for investment returns, the important question for us is: does the performance of markets in 2015 give us cause to question our expectations for long-term returns? Did anything do so badly, or so wonderfully, that we should change our view of what it is likely to do in the future? That is the question that we set out to answer here.

Investment returns in 2015 were mediocre. The FTSE 100 Index of leading UK companies put in a small negative return of -1.3%, while leading companies around the world managed a small positive return of 1.8%. UK government bonds, meanwhile, returned a wafer-thin 0.6% [1]. However, we know that markets are volatile: while long-term returns have generally been good, short-term returns can vary between excellent, mediocre and truly awful. To find out whether 2015’s mediocre returns should make us change our long-term views, we need to look at them in the context of the normal volatility of financial markets. We do this by creating what a statistician would call a ‘95% confidence interval’, which is the range within which we would expect annual returns to fall 95% of the time, taking account of markets’ usual volatility [2]. In the chart below, we show returns for 2015 for a number of different asset classes, with lines representing our ‘95% confidence intervals’ [3].

2015 Returns with 95% Confidence Intervals

The overriding message of this chart is that returns in 2015 were mostly well within the ranges that we would have expected at the start of the year. Smaller companies did better than large ones, and European and Japanese shares did better than those in the UK, US and emerging markets. Bond returns were generally a little below the middle of their expected ranges, and property did well but not exceptionally so. Gold and oil, which each had a pretty bad year, did not perform outside of normal expectations. With no returns falling outside our confidence intervals, we do not see any reason to depart from our existing view: that markets, while volatile in the short term, can be expected to deliver reasonably good returns over the long term.

The reason to invest is to generate returns in order to fulfil a financial plan; and financial plans are made in the expectation of good returns over the long run; however, investment returns are never guaranteed and can vary enormously from year to year. Looking back at 2015, it is hard not to feel somewhat disappointed – and indeed, we can’t help but feel that way. But mediocrity in one year is no reason to lose our faith that returns over many years will usually be good. And having a long-term plan has the great advantage of reminding us that it is really the long-term return that counts.


John Butters CFA, Chartered MCSI

Head of Investment


[1] Source: Financial Express Analytics. Global equity return is that of the MSCI All-Country World index, expressed in local currency. UK government bond return is that of the FTSE Actuaries UK Conventional Gilts All Stocks index.
[2] This is not intended to be a precise exercise in financial modelling but, rather, to use the confidence-interval approach to give a reasonable sense of the kind of behaviour one could expect from each market. To do this we take a relatively simple approach, using the historical standard deviation (i.e. volatility) of calendar-year returns and assuming that returns follow a normal distribution.
[3] Data source: Financial Express Analytics. Data periods: developed equities 1990-2014, emerging markets 2000-2014 (it seems reasonable to see the growing integration of emerging markets with global capital markets as a regime shift that makes a return to the extreme volatility of the 1990s unlikely), bonds 2000-2014, commodities 1993-2014, property 1980-2014. Other than for emerging markets, data periods are based on data availability. Confidence intervals are based on the standard deviation of annual returns over these periods. The centres of the ranges are Aspinalls’ arithmetic expected returns for each asset class. Asset classes are represented, respectively, by the following indices: FTSE 100, FTSE 250, FTSE Small Cap, S&P 500 in USD, MSCI Europe ex UK in local currency, TSE TOPIX in JPY, MSCI Emerging Markets in local currency, MSCI All-Country World in local currency, FTSE Actuaries UK Conventional Gilts All Stocks, FTSE Actuaries UK Index-Linked All Stocks, BofA ML Sterling Corporate, BofA ML Sterling High Yield, BofA ML G7 Government Bond hedged into GBP, BofA ML Global Corporate Bond hedged into GBP, BofA ML Global High Yield hedged into GBP, Bloomberg Brent Crude in USD, Bloomberg Gold in USD, FE UK Property Proxy.