S&S ISA Experiment – January 2022

I don’t usually post about my ISA experiment every month (previous updates here), but January has been an interesting month. Obviously not just for my ISAs, but across the market.

Some headline figures, to set the scene for those who haven’t been watching closely (good for you!):

MarketRepresentative ETFJanuary Performance
All WorldVWCE-5.0%
US Large Cap (S&P 500)VUSA-6.4%
US Small Cap (MSCI US Small Cap)CUSS-10.2%
UK Large Cap (FTSE 100)CUKX-0.3%
UK Mid Cap (FTSE 250)VMIG-8.3%
Our ISAs (UK mixed cap)N/A-4.8%
All figures include dividends

This is the first time our ISAs have diverged from the FTSE 100 in a pretty big way – very visible on the charts:

Not great, but what’s going on under the hood, where is this divergence coming from? Looking at each of our ISAs, there’s a dramatic difference:

  • My ISA: up 0.06% for the month (not much, but positive!) – within squinting distance of the FTSE 100 at -0.3%
  • My Wife’s ISA: down 9.7% (!) – not too far off the smaller cap FTSE 250 at -8.3%

So what’s going on here? Two key themes emerged when I dug a bit deeper:

  • Size
  • Randomness/luck

Size makes a difference

Thinking back to when I put our ISAs together, I did mine first, and basically started at the top of the FTSE 100. Skipped some here and there, but 80% of my ISA is from the top third of the FTSE 100 by market cap, and the smallest one is still in the 70s. Average market cap of my ISA is £42 billion.

I assembled my wife’s ISA second, after already picking most of the biggest parts of the FTSE 100. Aside from National Grid up near the top, her ISA is clustered around the middle of the FTSE 100, with a long tail, and 25% of it too small to make the index. Her average market cap is £9 billion – dragged up by National Grid; without that, it’s not much over £7 billion.

All told, that means my ISA represents about 40% of the FTSE market cap – not at the same weights (I’m basically equally weighting stocks, based on cost, not market cap – way too much hassle – plus a rough market cap weighting of sectors), but still a good chunk of the index. However, my wife’s only represents about 8%.

So when smaller cap stocks performed significantly worse this month, it’s no surprise that her much smaller cap ISA performed worse than my much bigger cap one. Before this month, UK large and small caps were close enough that it all averaged out, but not in this pullback.

Now, I’m not saying that large will always outperform small, not at all, just that when they diverge, my pseudo-index doesn’t index that well. I could sell out of some of her smaller cap positions to fill in some of the big cap holes (we don’t have HSBC, Shell, British American Tobacco, etc.), but a) I don’t want to pay the fees and b) none of this volatility is all that scary, especially when each individual stock is only £1,000 or so invested.

Luck (or randomness!) matters, too

Remember that I’m not making high-conviction bets on these stocks – it’s not far off darts against the FTSE 100 with some rudimentary due diligence and my own idiosyncratic ethical screen. BP vs Shell, Vodafone vs BT – not much more than a coin toss. Should average out in the end, right?

And yes, I still believe it will, but this month, the fact that I only hold 40 stocks meant I got a bit unlucky. Of the top 20 performing stocks in the FTSE 100, we only hold 4 (all in my ISA), and even the best weren’t great this month (average just under 8% up for that top 20). But we hold 6 of the 20 worst performing (5 of those in my wife’s ISA), which are down an average of almost 17%.

So again, no surprise that with our winners in my ISA and our losers in my wife’s ISA, and having fewer winners than losers, we underperformed the FTSE 100.

So what?

I’m not changing our approach on the basis of a single month – far too small a data set. And there’s no reason to think that it couldn’t have gone the other way, with us beating the index by 5 percentage points.

But it is a useful reality check that a pseudo-indexing approach does have real limits. Hopefully things that average out over time, but we can’t expect to perfectly replicate the index by only holding part of it.

Bigger picture, I’m not saying much about the volatility and pullback this month, because it’s nothing to panic about. This is the stock market being normal, at least so far – if there was no volatility, there’d be no risk premium! My handful of US fun money stock picks show the hazard in stock picking, too – yes, I own a very small amount of Gamestop, down over 50% since I bought. The pullback in these, plus some of the trendy working from home stocks, is pretty impressive, although less trendy stocks aren’t doing too badly, in the US, UK, and elsewhere.

Stay the course!

3 thoughts on “S&S ISA Experiment – January 2022

  1. I had a quick look at the Jan 2022 performance of my “equal sector weight” ISAs and they performed +2.8% including dividends. My mean average market cap is £35B, with a median size of £16B. The 32 shares represent about 53% of the FTSE100 market cap, or 44% of the FTSE350. 4 of my shares (13% of the portfolio) are outside the FTSE100, but I only have 2 shares that have a market cap of less than £4B (6% of portfolio). The mean market cap of the full FTSE100 is about £21B, with a median of only £9B. So my portfolio is definitely a mega-cap selection (with a high dividend yield / low PE bias).

    A quick look at one of my kids’ ISAs with 20 (similar mega-cap) stocks shows it did +2.5% in January. So it probably had more to do with the company size/type than the number of stocks.

    As you say, I don’t think one month performance is enough to tell you much really. I suspect the latest inflation figures and drop in US tech stocks have pushed up the price of large UK dividend paying companies. It feels good saying that after a decade of the opposite being true!


    1. That all feels consistent with what I saw – with more of a bias towards the bigger and value-ier companies, you’ve done better. And totally agree, it shows the value of diversification, we’ve both done a lot better than somebody who was chasing US growth tech stocks, with something like ARKK down 22% so far this year. I just did my monthly numbers for my entire portfolio, and the equity portion is practically identical to an all-world tracker – exactly where I want to be.


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