SDN123 wrote:One question springs to mind, was this analysis on the “standard” market index or the total return index?
The total-return indices. I did say so:
To give a concrete example: suppose that I'm a HYPer who wants to know whether my HYP strategy A would be better replaced with one that avoids high yields and is otherwise similar, and am wondering whether comparison over the 3-year period I've held so far is long enough to justify serious conclusions about which is better. I don't have enough data to cover more than one 3-year period of strategy A, so I choose a proxy strategy P for which I can get enough data to cover a lot of rolling 3-yesr periods. A reasonably obvious candidate for P is investing in an idealised FTSE 350 Higher Yield tracker: the way the FTSE 350 Higher Yield index is definitely not HYP, but it is at least investing in the same pool of higher-yield mid-to-high cap UK shares as my HYP strategy is (**); given that choice, the obvious candidate to compare it with is the FTSE 350 Lower Yield index. So if I calculate ((end date FTSE350HY)*(start date FTSE350LY)) / ((start date FTSE350HY)*(end date FTSE350LY)) for as many pairs of three-year-apart start and end dates as I can, using the total-return versions of the indices, and look at the proportions of results above and below 1, I'll get some indication whether a period of 3 years is enough to come to any serious conclusions about whether high-yield strategies are better than the alternative, at least in that pool.
Yes, I know it's easy to overlook one phrase in a post - I've done it myself...
SDN123 wrote:In your estimation could that make a difference to your figures (which index “wins” or “loses”)?
It will certainly make a difference to the figures. On which index "wins" and which "loses", I've done a very quick check of the two full-data-range outperformance vs underperformance answers I gave: for the FTSE350HY vs FTSE350LY (on data from 18/01/1999 to 06/04/2018 (*)), the total-return FTSE350HY index outperformed by 67.7% but the capital-only FTSE350LY index only outperformed by 8.7% over the full range, and for the FTSE100 vs FTSE250 comparison (on data from 24/06/1994 to 06/04/2018), the total-return FTSE250 index outperformed by 50.6% while the capital-only FTSE250LY index outperformed by 131.8%. No real surprises there, of course: if one ignores the dividend part of the returns, one places the indices that have higher dividend yields (the FTSE350HY and FTSE100) at a bigger disadvantage than those with lower yields (the FTSE350LY and FTSE250).
It is perhaps surprising that placing the FTSE350HY under that disadvantage isn't enough to reverse the result of the comparison. I think the reason for that is that the start of 1999, though by no means the peak of the tech boom, was already some way into it, which places the FTSE350LY at a different disadvantage. I can take the capital-only comparisons back rather further to get them well away from the tech boom distortions, to 31/12/1992 - 06/04/2018 data in both cases. Those have the FTSE350LY index outperforming the FTSE350HY index by 2.1% (**) and the FTSE250 index outperforming the FTSE100 index by 170.3%. I cannot produce total-return outperformance figures for that date range, but the capital-only FTSE350LY outperformance figure is so low and the capital-only FTSE250 outperformance figure so high that I'm in no doubt that the total-return comparisons would reverse the former and not reverse the latter.
So yes, pretending the dividends are not part of the returns could change which index one decides "wins". Not certain why one would want to pretend that, though... (At least as an individual investor who is going to receive all the returns - there are obvious conflict-of-interest situations when one person is going to receive the income and another the capital returns.)
(*) So I should have said that I have a bit under 24 years of data rather than a bit over 25 - a mistake: the latter is what I would have had if I'd updated my data to include the last 15 months...
(**) Like the other outperformance figures I've given, this 2.1% is an overall over-the-full-data-range figure, not an annualised figure - which I'm stressing because it's small enough to be mistaken for one!
SDN123 wrote:As a seperate question, do you think that it would make much difference to your final conclusions (about the period of time to judge a strategy)? My guess is probably not, but I’m curious.
That's my guess as well, but I won't take it any further than a guess - establishing the period of time required to judge a strategy if one ignores part of its returns is worth very little effort IMHO!
Gengulphus