Ignore the scar left by April’s brief sell-off, and UK stocks are having a good year. Make that another good year: the FTSE All-Share’s total return of 7.6 per cent in 2025 so far means the three-year annualised equivalent is now 8 per cent.
Nor, however, are bond investors faring too badly. And the yield on 10-year gilts, while not at January’s panicky levels, remain high enough to attract some investors. The recent uptick in inflation, pared with worries about Labour’s fiscal plans and jitters in global fixed income, mean medium-duration UK sovereign debt offers a guaranteed annual return of 4.65 per cent.
Comparing gilts to ‘UK shares’ forces the disclaimer that the footsie is far more global than domestic. Nor are the long-term outlooks for the state’s finances and multinational corporates much alike. But compare we must, because relative returns matter to investors and savers.
What might that comparison look like? Based on LSEG’s weekly market data since 1987, the All-Share’s trailing price/earnings multiple of 15.5 times suggests we can, on average, expect an annualised total return of around 4.5 per cent over the next five years. In other words, there’s not much in it.
Should we follow precedent? While PE multiples of less than 10 or more than 25 are decent predictors of five-year returns, the correlation is a little blurrier when valuations sit in between (as they do most of the time). The variance in rolling five-year stock returns is significant, after all.
One byproduct of this is that five-year gilt yields have offered better returns than UK stocks ended up providing in 51 per cent of weeks from 1987 to 2020. Ordinarily, that might be a bet worth taking, given bonds’ lower short-term volatility. Still, given many of the past four decades’ monetary and fiscal assumptions are now over, this trend might tell us less than nothing: it could be misleading.
Then again, perhaps the fault lies in the premise of comparing asset returns.
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Indeed, once you’ve decided to put your capital to work, the risk-reward trade-offs quickly emerge. Sure, you could buy a money-market fund. Or you could just invest in the S&P 500. Or only technology stocks. Or one blow-the-doors-off idea. With leverage.
For those not trying to ‘win’ investing, the 60/40 portfolio neatly captures the idea that consistently identifying the best companies or asset classes to buy is likely a dream. Fortunately, by consciously settling for a reasonable balance of risk and reward – what the investor Ben Trosky called “strategic mediocrity” – you can still do extremely well.
When he started running Pimco’s high-yield bond fund in the nineties, Trosky calculated that to place in the top decile of peers over a decade, he just needed to consistently rank in the top third each year. Embracing mediocrity worked. By investing diligently – but never taking the risks that might lead him to mistake luck for skill – his fund was the number one performer in the 10 years he managed it.
What then might strategic mediocrity look like today? At the asset level, high-yield bonds remain a solid option. While their premium to sovereign debt translate to equity-like returns, their typically shorter durations reduce the risk of wild price swings. And while the growth of private credit means many riskier issuers have left the market, there’s enough volatility for specialists to add value.
Among UK high yield funds, Royal London Sterling Extra Yield (IE00BJBQC361), Schroder Strategic Bond (GB00B7FPS593) and Invesco High Yield UK (GB0033028555) are three that appear to have struck the right balance between performance and consistency. Next week, we’ll look at a stockpicker whose process offers some of the hallmarks of Trosky’s ‘good enough’ approach.