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Since its creation in 1992, the FTSE 250 index of stocks has delivered an total average annual return of around 9%. That solid return is thanks to its large weighting of mid-cap growth shares that often exhibit superior profits — and, by extension, share price growth — potential.
That said, the returns on FTSE 250 stocks have significantly cooled in more recent years. If a 40-year-old wanted to build a portfolio based around the index, here’s some indication of how much they could make by retirement.
Tough times ahead?
Past performance is not always a reliable guide of what to expect. But the mid-cap index’s cooling returns is worth studying to get an idea of future returns.
Since early 2015, the FTSE 250’s average yearly return has dropped to roughly 5%, reflecting enduring weakness in the UK economy and political turbulence at home. Just over half of the index’s earnings come from these shores, so its underperformance perhaps isn’t all that surprising.
Looking on the bright side, now could well prove a great time to invest in the index, as its poorer performance leaves scope for it to catch up with more strongly performing overseas indexes like the S&P 500.
However, the fragile condition of Britain’s economy means investors should be braced for further disappointment. In recent weeks, key data has shown:
- Enduring economic stagnation, with GDP rising just 0.1% in November.
- A deteriorating jobs market and rising unemployment, the latter hitting 4.3% in October.
- Continued pressure on consumer spending, with retail sales dropping 0.3% in December.
Chasing better returns
This is why I think individuals should consider avoiding an index tracker fund like the iShares FTSE 250 ETF. Instead, I think buying individual FTSE 250 growth stocks could be a better route to to think about, although, of course, the best investment for each investor will be according to their own individual goals and circumstances.
Kainos (LSE:KNOS) is a stock I’m considering for my own portfolio. Like US tech giants Nvidia and Microsoft, it has considerable growth potential as artificial intelligence (AI) usage becomes mainstream.
Kainos — which helps private and public sector organisations automate and digitalise operations — booked 40 new AI & Data project contracts between April and September, taking the total to 140. The firm’s huge investment in AI could continue to reap strong rewards, though investors should remember that competition in this sector remains fierce and that development setbacks could hamper growth.
With a forward price-to-earnings (P/E) ratio of 19.8 times, Kainos shares look cheap compared to many other US and UK tech shares. This could leave scope for further share price gains.
Since early 2015, it’s provided an impressive average annual return of 15.2%.
An £840k+ portfolio
If Kainos’ returns of the past decade remain unchanged, a 40-year-old investing £250 a month would have a portfolio worth £841,717 after 25 years. That excludes broker fees, but also doesn’t take into account potential dividend income. Prices could also go up and down in that time.
By comparison, a 5%-yielding FTSE 250 index tracker would make just £148,877.
Predicting the future is impossible, but this example gives a good idea of what could be achieved by buying specific FTSE 250 growth stocks in a well diversified portfolio.