Source: Radio New Zealand
Supplied/123rf
First person – A little while ago, I wrote about my fairly dismal returns investing in Sharesies.
I started on the platform in 2017 and to date, have a simple return of 28.14 percent. That’s well below what I could have achieved in a managed fund.
Sharesies say it calculates the simple return by dividing total return by the largest amount my portfolio has ever had invested.
Fund managers pointed to some of my investing mistakes – I have some funds that have done pretty well and some direct investments that have performed okay, but I also own some “big name” stocks that have been rather lacklustre in recent times.
But Sharesies pointed out that I could be short-changing myself with this calculation, and perhaps I wasn’t as bad an investor as I had thought I was.
Co-founder Leighton Roberts said, because of the way I’ve invested my annualised money weighted return is 11.11 percent a year.
I usually invest a steady amount each month but there have been a couple of larger deposits, which Roberts said weighed my simple return down.
So why the difference?
Roberts acknowledges that the way the site describes returns, displaying the overall simple return on the dashboard, is not ideal.
“There’s different types of maths and different ways of comparing things and some of them are better for different things than others,” he said.
“So the most common ones are a simple return, which is literally just what percentage return you’ve made, regardless of time or how much money you’ve put in and all that sort of thing.
“Then for most fund managers the best way to compare something is a time-weighted return…that’s picking a point of time, normally it’s like for a year and saying, okay, from point A to point B that we’ve measured all of us against, and removing any sort of flow that’s gone into this, so any new money, and the timing of that, what has the return been?
“Trying to make sure it’s a best attempt, I suppose, at apples with apples. And then at an individual level, normally the best way to compare your own return once you’ve made all those selections is money weighted returns.
“So that takes into account the timing … even on a fund that historically performs very well, you could be unlucky and choose to buy in at the highest time and sell at the lowest time. So the money weighted return shows you exactly on an annualised basis what you’ve earned based on the real money flows …that’s best for comparing, particularly against something like a bank account.
“If someone invested eight years ago and put $1 in and they’d earned 10 percent in total, just for easy maths on their investment, but then one day ago, they put $100,000 in and that earned $10,000 or something on there, one of those numbers is going to say 10 percent, which is your simple return. And your money weighted return is going to say 10 percent times 360. So it’s going to say like 3000 percent.
“That one day when you put such a large amount of money, just massively over indexes the whole thing. And in your case, it’s sort of done exactly the same, like you probably perhaps started with a smaller amount. And when you put a bigger amount in, then that drags all your averages down.”
Note – I did make a large deposit towards the end of last year but it was more like $10,000 than $100,000.
Gertjan Verdickt, senior lecturer in finance at the University of Auckland, said a money weighted return would be a more meaningful number than simple return.
“Their simple return doesn’t really measure investment performance; it’s closer to return on peak exposure, which doesn’t cleanly answer any useful question. The MWR is the annualised rate your actual dollars earned, weighted by how long each contribution was invested. That’s the right answer to ‘what did my money earn?’
“One caveat: MWR mixes investment performance with the timing of your contributions, so you can’t use 11 percent to judge whether Sharesies or your portfolio choices are doing well versus alternatives. For that you’d want a time-weighted return: the return of the investments themselves, ignoring cash-flow timing. That’s the standard measure for comparing funds and platforms, and it’s what you’d want if the question is ‘is Sharesies a good place to invest?’ rather than ‘how did my money do?’”
Roberts said simple return was chosen as the option displayed on Sharesies because it was reasonably simple to calculate.
“We’re about to put money-weighted returns in for people as well …. Now where it gets tricky… often people will want the return but they want it based on certain inputs or without certain inputs for whatever reason.
“So they might want to include this deposit but not this deposit, or they don’t want to include the withdrawal, or they don’t want the historic things they’ve invested in to be included in their returns now, which is a change. So there’s all sorts of reasons that customers come back and say, look, I want to see this but I don’t want to see this.
“So it’s the hard part about building in is actually giving it the right level of flexibility, I suppose, for people that it makes sense for them…if you put a money-weighted return onto a stock, and say you bought Infratil the day before it went up, whatever percentage it went up the other day, 20 percent, then a money-weighted return is going to annualise that for you 365 times. And all of a sudden, it starts to get very misleading as a customer, rather than showing 20 percent, you’re all of a sudden looking at a number that predicts that it’s going to do that every day.
“So while on the face of it sounds really easy, that’s not something we wanted to do when we first launched the platform or for new customers, because it’s just misleading one way or the other. It’s either massively exaggerating the return, which is obviously very risky, or massively over sort of assessing the risk.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand