Compounding Magic

Here is a take on “compounding” from a reseller of the Winton Capital trend following fund:

“There’s a good rule of thumb for estimating realistic returns from equities over time. Take the rate of inflation and add on a risk premium of 3%. With inflation currently at around 2.6%, you could expect returns from equities to be around 6% over the next few years. However, big external shocks can have a significant negative effect on equity markets and there is no guarantee that you will get back what you invest. The Matrix Ascension Plan aims to give you higher returns than equities over the next seven years and capital protection. The Matrix Ascension Plan enables you to benefit from the returns of a Fund managed by Winton Capital Management, a company that has a track record of producing high returns for investors. In October 1997, they launched the Winton Futures Fund which has provided investors with annualised returns of 21.01%. As a comparison,the annualised returns from the FTSE 100 Index over the same period have been 0.28%. To put these returns in some sort of context, if you had been the buyer of Vincent van Gogh’s ‘Irises’ in 1947, you would have paid $80,000. The next time it changed hands, in 1987, it was bought for $53.9m. This seems an extraordinary rise in value but mathematically it shows a compound average annual growth rate of 17.7% – less than the annualised returns from the Winton Futures Fund over the last six and a half years.”

I liked the van Gogh compounding example. It really points out the “magic” of compounding.