The last five years have been pretty fantastic for the UK stock market. Following the chaos of the pandemic, British shares have largely bounced back nicely, with some reaching impressive new highs.
Of course, not every stock’s been a winner. Yet when looking at the total return of the FTSE 100 as a whole, the UK’s flagship index has vastly outperformed historical norms, reaching new record highs earlier this year.
So how much money have investors made since August 2020?
Crunching the numbers
Let’s start with passive index investors. Over the long term, the FTSE 100 has generated an average annualised gain of around 8%. But since 2020, with the market still reeling from the impact of the pandemic, that return’s jumped to 12.9%.
That’s ahead of even the S&P 500’s usual annual gains. And anyone who invested £5,000 at this rate five years ago is now sitting pretty on around £9,500.
This is yet another demonstration of the power of investing during a stock market crash or correction. While it can be a volatile experience, buying when everyone else is panic-selling is a proven strategy for building wealth.
But even these impressive gains pale in comparison to what some individual stock pickers have enjoyed over the same period. And few stocks demonstrate this as well as Rolls-Royce (LSE:RR.) has.
Investing in turnarounds
Under new leadership, the aerospace & defence engineering giant has gone from the brink of bankruptcy to new record highs, delivering a staggering 1,124% return in the last five years. That’s the equivalent of a 65% annualised return, enough to transform a £5,000 investment into £61,200!
Needless to say, anyone who saw the potential and bought shares is likely patting themselves on the back right now.
Today, the business continues to show promise. The air travel market has now recovered beyond pre-pandemic levels, driving up demand for the group’s higher-margin aftermarket maintenance services. And with geopolitical tensions heating up, the company is finding new growth opportunities for its defence-focused business.
Both are pushing free cash flows higher, giving management the flexibility to continue mending the cracks in the balance sheet and tackle its outstanding debts.
Of course, there are still some notable threats to consider. While geopolitical tensions are a tailwind for its defence segment, that’s not the case for its core civil aerospace arm, which continues to drive the bulk of cash flows.
Higher oil prices drive up fuel costs. And airliners have historically responded by cutting back the number of available flights, handicapping demand for the firm’s engines and services. And with the stock now trading at a premium valuation, any unexpected slowdown could trigger significant volatility. That’s something investors will have to consider carefully before putting any money to work in 2025.
The bottom line
Not every stock has been an outperformer like Rolls-Royce. And there are plenty of examples where growth expectations failed to materialise, resulting in disappointing losses. For example, Ocado‘s down over 80% over the same period.
As for Rolls-Royce, with most of its future growth already baked into its share price, this isn’t a business I’m rushing to buy today. Instead, I’m focused on finding other turnaround opportunities within the stock market that are still under the radar of most investors.
