The FTSE 250 has long been the UK’s flagship growth index. Being home to mid- and small-cap companies in London’s main market exposes investors to stocks with greater long-term potential. Of course, these smaller businesses also open the door to higher levels of risk. That’s why, historically, the FTSE 250 has been significantly more volatile than its larger sibling, the FTSE 100.
However, with economic conditions improving throughout 2024, the index has delivered some impressive returns year-to-date. Since January, the FTSE 250’s up around 11% including dividends. But how much money could investors have made if they bought an index tracker fund at the height of the pandemic in March 2020?
Capitalising on a market crash
When lockdowns were deployed around the world, the stock market crashed. In the case of the FTSE 250, the index tumbled by almost 40% between 20 February and 20 March 2020. However, as prudent long-term investors know, buying when stocks are in freefall can be a lucrative strategy to capitalise on the eventual recovery.
In the case of the FTSE 250, since its Covid lows, the index has gone on to generate a 52% return. However, when the extra returns generated from dividends are included, the total gain for patient investors is closer to 82%. In other words, If I’d invested £5,000 in a low-cost FTSE 250 index fund, I’d have around £9,100 today.
That roughly translates to a 16.2% annualised return. And considering that’s almost triple the average return generated by this index over the last decade, it goes to show that capitalising on market volatility can be very lucrative in the long run.
However, the returns for stock pickers may have been even greater.
Seeking higher returns
Instead of buying shares in a passive index fund, investors can take matters into their own hands and consider investing in individual businesses directly. This does require a far more hands-on approach and dedication towards research and portfolio management. But this higher risk comes paired with the potential for generating market-beating returns.
That’s certaintly been the case with Clarkson (LSE:CKN). The global shipping services firm saw its operations disrupted as the pandemic decimated supply chains. However, the group’s cash-rich, low-debt balance sheet gave it all the financial resources needed to weather the storm. And as supply chains were repaired, demand for international shipping services rebounded.
As such, the FTSE 250 stock’s up just over 90% over the period, or 125% after including the impact of dividends. That’s the equivalent of a 22.5% annual average return, which would have grown a £5,000 initial investment to over £11,200.
Shipping is a notoriously cyclical industry with a lot of moving parts. Freight rates have started to fall in recent months as the shipping industry adapts to the ongoing conflict in the Red Sea. As such, Clarkson’s profits, in the near term, could start to slow. In other words, maintaining this double-digit return for new shareholders today seems unlikely.
Nevertheless, it goes to show that by researching the right businesses, investors can potentially unlock far superior returns, especially when buying during periods of economic uncertainty.
