Confusion about Satrix 40 Returns

[syntax]

OK, so on the website it shows for example a 19% increase in 1 year and 49% over 5 years.

I am reading a finance magazine that says over 5 year period until march 31st
"the Satrix 40 ETF was ranked fourth in the large-cap sub-category, with an annual average return of 7.83 percent"

What exactly do they mean on this? That on average I will get a return of 7.83% per year on my investment?
Where does satrix get their 19% for the last year from and their 49% over 5 years from?

 

[supersunbird]

19% is what it grew in the last year. So if you put in R100 000 a year ago it will be R119 000 now.

49% is what it grew over the last 5 years. So the R100 000 you put in 5 years ago will be R149 000 now.

The 7.83% is probably the average return since the fund was created 12 or whatever years ago.

 

[Jehosefat]

The 1 year and 5 year returns would be: (current price / starting price) - 1.

The average return over 5 years is: (1 + 5 year return)^(1/5) - 1.

The 7.8% average works out to around 46% so it might just be a timing difference.

 

[syntax]

19% is what it grew in the last year. So if you put in R100 000 a year ago it will be R119 000 now.

49% is what it grew over the last 5 years. So the R100 000 you put in 5 years ago will be R149 000 now.

The 7.83% is probably the average return since the fund was created 12 or whatever years ago.

Doesnt really make sense then, the article definitely says 5 years ending march 2013.
on satrix website I selected 5 years and thats the return it gave me.

7.83 * 5 = 39%, which is a long way off their 49%.

I would also say 7.83% is quite disappointing. Considering that isnt taking into account any fee's or costs either.

Am I correct in saying then that my bond which is currently prime would be a better place to put my money for now?

Although, once the amount in my satrix account, exceeds the amount in my bond, I would then be earning more in my satrix as the % would be of my total capital? Unless I am confusing myself again.

Fact of the matter, I have spare cash lying around, I have invested some in satrix and some in coronation top 20.
The rest has gone into the bond. Now, i am trying to see if there are better decisions that I can do. After meeting with a financial advisor, his fee's were just so ludicrous that I would be better off just doing what I am currently doing now.

 

[supersunbird]

Looking at the graph below, I see March 2013 fell in the down period of the graph, so that could explain the 39%, also we are not able to see where the graph started at March 2008 (as they woudl have used in the article, so as Jehosefat say, could easily be a timing issue):



Remember the Satrix 40 is resource heavy, and we know how those have been performing over the past while.

 

[Jehosefat]

Doesnt really make sense then, the article definitely says 5 years ending march 2013.
on satrix website I selected 5 years and thats the return it gave me.

7.83 * 5 = 39%, which is a long way off their 49%.

Thats not how you would have to work it out.

To get the 5 year return based on an average of 7.83% per year you would work it out as (1 + 7.83%)^5 - 1 which gives a return of 45.78% over 5 years. The difference between this and the 49% is probably due to different observation periods (i.e. April 2008 - March 2013 versus August 2008 - July 2013).

 

[syntax]

Thats not how you would have to work it out.

To get the 5 year return based on an average of 7.83% per year you would work it out as (1 + 7.83%)^5 - 1 which gives a return of 45.78% over 5 years. The difference between this and the 49% is probably due to different observation periods (i.e. April 2008 - March 2013 versus August 2008 - July 2013).

ok cool, can you explain the 1+ % part and the -1 part?

About my other bit, does it then make sense that it would be better initially to put money into the bond, but in long run it would be better to put in something like satrix because the return would be on a larger amount (i.e. an amount that is increasing, whilst my bond is something that is decreasing)?

 

[kdub]

Put it in your bond - remember by putting it in your bond you get prime (or whatever) after tax. Satrix would have tax implications.

ok cool, can you explain the 1+ % part and the -1 part?

About my other bit, does it then make sense that it would be better initially to put money into the bond, but in long run it would be better to put in something like satrix because the return would be on a larger amount (i.e. an amount that is increasing, whilst my bond is something that is decreasing)?

 

[Jehosefat]

ok cool, can you explain the 1+ % part and the -1 part?

About my other bit, does it then make sense that it would be better initially to put money into the bond, but in long run it would be better to put in something like satrix because the return would be on a larger amount (i.e. an amount that is increasing, whilst my bond is something that is decreasing)?

The 1 + x% is to take into account that you include the capital amount. So with a 5% return if you start with R1 then after 1 year you would have the original amount + the 5% of that amount so R1 * 1.05. Then after another year you now have R1.05 * 1.05 because you now earn interest on the R1 as well as the additional 5c that you earned the previous year.

The -1 at the end is then to remove the initial amount so you just have the return. So if you started with R1 then after 5 years at 7.83% per year you would have R1.4578. But because you started with R1, your return is only the additional 45.78c.

As for which option is better. Well that's a relatively subjective question that depends on quite a few things like: what is your risk tolerance; do you need access to the cash; if so, how quickly would you need it; what is the interest rate on your bond etc.