FTSE 250 index tracker funds are a terrific way to grow wealth while barely lifting a finger. Compared to its older sibling, the FTSE 100, the UK’s flagship growth index has historically generated a superior return of around 11% a year versus 8%. Of course, it’s been a more volatile experience. Yet for those saving for retirement, the long time horizon may permit greater risk-taking.
So how much money would I have made if I’d invested in the FTSE 250 in July 2014?
Owning the FTSE 250 since 2014
Since then, shareholders in low-cost FTSE 250 tracker funds have earned a total return of 68.98% to date. So those who invested £10,000 a decade ago now have just shy of £17,000. That’s certainly nothing to scoff at. But breaking down this return on an annualised basis quickly reveals a problem.
That 69% over 10 years is the equivalent of just 5.4% a year — half of what the index has generated on average since its inception. How so?
There are a lot of factors at play. However, one of the main reasons behind the lack of more recent growth stems from a lack of exposure to the tech industry. For reference, only 1.3% of the entire FTSE 250 is concentrated in technology. The lion’s share is instead focused on financials, consumer staples, and industrials, none of which exactly have a reputation for explosive growth.
But there have been several constituents who’ve made a big splash. Games Workshop (LSE:GAW) is up almost 1,700% or 33.5% a year since July 2014 and that’s even before taking dividends into account!
Sadly, as a market-cap-weighted index, the impressive returns of small-cap companies often get drowned out by the lacklustre returns of larger enterprises. And by the time these firms gain significant influence over the FTSE 250, most of the growth story may have already happened.
The power of stock picking
Index tracker funds come with a lot of advantages. But they’re far from a perfect solution to building wealth. And for those seeking chunky market-beating returns, a stock-picking strategy may be more appropriate.
Instead of owning hundreds of businesses, investors can build a more concentrated portfolio consisting of only the top-notch enterprises they want to own. This requires a far more hands-on approach and comes with higher risk since a poorly constructed and managed portfolio can end up destroying wealth.
But it also means the explosive performance of companies like Games Workshop doesn’t get drowned out by the underperformance of other lacklustre enterprises. This company, in particular, has seen tremendous success. It’s thanks primarily to the pricing power that’s been cultivated by management for decades.
Pairing that with a global partnership network with independent retailers, the business was able to expand its footprint globally at negligible cost. The end result is rapid growth with double-digit margins that continue to grow even today.
Of course, not every FTSE 250 company has enjoyed the same fate. Cineworld was once a FTSE 250 darling, after all. Even Games Workshop has its fair share of risks to tackle even today. It’s up to stock pickers to do the research to find the best opportunities. That’s something index investors don’t have to worry about. Personally, I still prefer to pick my own stocks (like Games Workshop) for potentially richer rewards.
