Vanguard's IRR seems to be much higher than I'd expect

[newcreation17]

I'm trying to work out what's going on with the personal rate of return Vanguard gives you, as it seems to be wildly off for me. This is the number stated on the home screen, and when you view performance.

I understand what IRR (and XIRR) are, and I realise the rate of return takes into account when you made investments. Here's is an outline of my payments:

Two one-off payments of £4000 in Sept 2021 and £2000 in Nov 2021. Otherwise, regular payments of £200 between (and inclusive of) Sept 2021 - Dec 2022, then reduced to £100 regular payments between Jan 2023 - and today (Dec 2023). These are technically slightly different to account for fees, and to simplify let's just say payments on 1st of the month. I'll round everything below to nearest £5 (shouldn't change much).

In total, contributions are roughly £10430 (with £945 in investments returned), and amount ended up with is £11375. It's all (except a few negligible pennies in cash) in the FTSE Global All Cap Index Fund Accumulation.

Here's what I don't get: my personal rate of return is listed as +11.36%. I tried copying my payments and dates (assuming made on the 1st each time, surely close enough) into excel and XIRR gives 4.67%, which feels intuitively for me closer to the actual figure (bearing in mind some main bulks of money were actually paid near the start, over 2 years ago). I tried to recreate this for myself, by setting up new columns where I pretend each new investment x is in its own account and took xr[sup]n,[/sup] where n is how many months ago it was invested and r = R[sup]1/12[/sup] is the monthly interest, where I can choose R to be a candidate (yearly) rate of return. And, indeed, adding all of these up and taking R=1.0467 (4.67%) I end up with almost exactly the right figure of £11375.

TLDR: it seems my investments and returns would mimic a bank paying around 4.67%. Sure, I may have made some very small errors in exact dates, fees etc., but I just can't see how this could make up to the stated 11.36% given by Vanguard. Is it because they only use IRR in yearly blocks rather than a more exact XIRR, taking into account payment times by the month? Even if so, I still don't get figures anywhere close. It'd be nice to know what's going on and what their IRR actually means! (is it really possible there can be such a huge difference if they, say, bulk things together into yearly periods?).

Does anyone have any idea of what's going on here? What am I missing?

 

[systematiker]

@newcreation17 I haven't run the calcs myself, but taking a quick guess: Is the vanguard IRR not annualised? That is, is it the total since you opened the account, rather than an annual compounding figure?

 

[maizeemay]

@systematiker Yep this is the answer. I built my own spreadsheet to keep track of the IRR on my various investments and can confirm that Vanguard's lifetime return is just IRR[sup]years since you started[/sup].

I could always replicate it very closely and I think the small divergence is just because Vanguard's calculation probably does not count the time that your money sits in your account as cash. My regular deposits usually spend a day or two sitting as cash in my Vanguard account before they're used to buy units. And for a time I used to buy ETFs before I realised they could only be purchased in whole units resulting in some of my deposit each month sitting in my account as cash until I manually invested it.

I'm also not sure how they account for the account fee, though it's not a material consideration anyway.

Right now if I calculate my lifetime return in Vanguard, based on the timing of my regular deposits and the current value of my Vanguard account, I calculate my lifetime return to be 61.85%, which is pretty close to Vanguard's calculation of 61.77%.

 

[julia736]

@maizeemay The percentage gain shown by Lloyds / Halifax / iWeb is also over the lifetime of the investment.

I don't recall how it's labelled, but I guess it may be useful for capital gains purposes.

With multiple different purchases of a fund, I guess it would be necessary to iterate through a lot more information to calculate it differently.

 

[newcreation17]

@maizeemay Are you sure about this?

On my "overview page" it says personal rate of return is 11.36%. If I click 'view performance' below that, it gives the same figure with an i symbol for more info, which says: "Your rate of return - Your personal performance uses a formula called internal rate of return (IRR), which is ... etc."

Edit: ah, but maybe you're still correct, because maybe this year's IRR is so much better than since inception that one has (IRR-since-inception)[sup]years since Inception[/sup] is lower than (IRR-over-last-year)[sup]1 year[/sup] , even though 1 < 29/12 (money has been in about 29 months).

If this is really what the figure means then that's bloody bonkers, especially when IRR usually means a yearly rate! Surely a useful thing is to be able to compare the rate to, say, fixed rate savings account rates to give you some intuition.

Edit2: Yep, I think you might be right.

I tried manually working out my IRR just over this year and got 14.66%, which is close to Vanguard's 14.71% (before I think I'd messed up the yearly calculation for this year). If I do it since inception I get 4.67%, as already mentioned, but if I raise that (or rather 1.046...) to the power 29/12 (it's been invested for about 29 months) then I get 11.67%, which is then close to Vanguard's 11.36%.

I still think it's mad to give that figure rather than an annualised one (as it's supposed to be a "rate"), and the website does a terrible job in giving you these details. It'd be nice to be able to look at the figure and quickly be able ro know if it looks "good" or not (4.66% is thr sensible figure, the equivalent rate to if I had jt in a bank, 11.36% requires me to look up how long since the account's Inception and do a calculation). It should be annualised, or normalised to some length of time, or it's not a "rate"! Anyway, this is very good to know and I'm surprised I wasn't able to find this elsewhere. !thanks !

 

[kristine403]

@newcreation17 I'm confident they're right, because I looked at Vanguard's IRR for arbitrary 12 months periods and it's correct.

The annualised figure is the one I prefer as it's much easier for me to interpret. I will have a think about lifetime IRR though and see if I can make sense of it.

 

[newcreation17]

@maizeemay

Right now if I calculate my lifetime return in Vanguard, based on the timing of my regular deposits and the current value of my Vanguard account, I calculate my lifetime return to be 61.85%, which is pretty close to Vanguard's calculation of 61.77%.

I'm talking about the figure you see in the top-right box on the "overview" screen you first see when you log in, labelled "personal rate of return" (hopefully yours is the same, it also gives the same figure when you press "view performance").' Are you absolutely sure it tells you 61.77% for this?

 

[newcreation17]

@systematiker That would be kind of odd, as otherwise it's not a "rate"!

They should really make all of this a bit clearer.

 

[newcreation17]

@systematiker !thanks

 

[raelynn58]

@systematiker I thought this but given it's accumulating then the return is simply capital growth over funds invested so £945 / £10,430 being c 9%. Whilst this supports OPs XIRR it means that the vanguard makes even less sense

 

[ilovegod7777]

@newcreation17 My feeling with vanguard is they concoct some freaky stats that seem very optimistic to keep you encouraged early on

 

[newcreation17]

@ilovegod7777 Who knows! I think it says somewhere it's just an "estimate", but being 4-5% off the XIRR I calculate is kind of ludicrous!

 

[kristine403]

@newcreation17 Mate, I just did exactly this myself yesterday, with the same result. Did you ever get a resolution to this?

 

[newcreation17]

@kristine403 Yes, the figure they give you isn't annualised. It's mad to me that they don't give you the annualised figure!

So I tend to just take their IRR figure (e.g., 1.12 if they say 12%) and raise it to the power of 365/n, where n = number of days since reopening the account.

 

[kristine403]

@newcreation17 Thanks, yeah I read through the comments and confirmed it with my account.

This is annoying because it's basically a useless metric. IRR is the interpretable metric, there's really no point in compounding it to the lifetime of the account, given that we make cashflow transactions (which is why we need IRR in the first place).

Very tedious, especially because there's no API to fetch your data, so I can't just create my own tracker.

 

[dundermifflinfarmer]

@newcreation17 Please use simpler language?! What is XIRR and IRR?

It really looks like you either forgot to factor in that the rate of return for the £6000 would proportionately be much higher than the rate of return for the £200 deposits years later, as the buy in level was lower? For the FTSE Global All Cap Index Fund Accumulation, calculations are based off the performance of the companies contained in the index, not global interest rates, and during the later half of 2023 stocks have performed consistently better.

Also have you taken into account compounding? And that some vanguard funds automatically reinvest your dividends?

 

[raelynn58]

@dundermifflinfarmer I would heavily recommend learning about the IRR. Majority of retail investors are unfamiliar but it is the bread and butter of the professional investor

 

[newcreation17]

@dundermifflinfarmer

Please use simpler language?! What is XIRR and IRR?

I think I did use mostly "simple" language, but XIRR and IRR are just well known notions of rate of return of investments, anyone who doesn't know them can obviously just Google them. It would be kind of weird to write up a whole explanation of what they are on a thread where, to be able to answer my question, the commenter would likely already know what these concepts are (or just look it up).

It really looks like you either forgot to factor in that the rate of return for the £6000 would proportionately be much higher than the rate of return for the £200 deposits years later, as the buy in level was lower?

I'm not sure I follow. As I explained, I tried simulating each payment essentially creating a new little bank account which then grows by a monthly rate (that one can play with) and then added them up. What kind of formula wouldn't take into account that large lots of money will ... account for proportionally more? And of course things like XIRR doesn't just forget the relative sizes of the deposits.

For the FTSE Global All Cap Index Fund Accumulation, calculations are based off the performance of the companies contained in the index, not global interest rates

Huh? Where did I say they were based off global interest rates?!

and during the later half of 2023 stocks have performed consistently better

Agreed, which makes it a bit more surprising that my rate of return was so high, as two big bulks of my investments (which, as you say, form a large proportion of the total) came in over 2 years ago so on average haven't performed as well as, say, the much smaller pots of money that came in over the last few months.

Also have you taken into account compounding?

Yes, the whole methodology I explained above (and concept of XIRR) of course takes compounding into account. That said, such "rates" are supposed to be indicating what rate you're essentially getting before compounding to make it a useful figure. Another way of putting it is: imagine that, instead of investing each payment in the index fund, you just put it into a saving account (exact same payment, exact same timing), and that account has fixed interest of r%. Then what would r need to be to match the return you got from the investment?

And that some vanguard funds automatically reinvest your dividends?

Yeah, I think so. The fund is accumulation so everything is reinvested, and the figure of "current value of investments" of course includes such reinvestments. Thanks for these suggestions though.

 

[cor]

@newcreation17 Are you correctly accounting for dividends? Does the final balance of £11,375 also include dividends paid over the period?

 

[newcreation17]

@cor Yeah, pretty sure, it's an accumulation fund so dividends go back in.

On my 'holdings' it is all (except £0.08) in this index fund, with total cost stated as £10,400 and current value £11375. No money has left and been paid into any of my other accounts.