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Woodford glossary

When discussing cumulative returns, the term ‘annualised’ is sometimes used to describe the year-by-year return delivered by an investment. For example, if an investment grows from £1,000 to £2,000 over 5 years, the cumulative return over that period will be 100%.

Calculating the annualised rate of growth isn’t quite as simple as dividing that 100% by 5, however, because an annualised figure includes the effect of compounding.

Instead, the compound annualised growth rate in the example above is 14.9% – although returns are unlikely to have been accrued in a smooth straight line, the investment is said to have grown by 14.9% per annum as demonstrated below.

Starting value Annualised growth rate End value
Year 1 £1,000.00 14.9% £1,148.70
Year 2 £1,148.70 14.9% £1,319.51
Year 3 £1,319.51 14.9% £1,515.72
Year 4 £1,515.72 14.9% £1,741.10
Year 5 £1,741.10 14.9% £2,000.00

Over time, small differences in an annualised growth rate can make a substantial difference, which is why Albert Einstein called compound interest the “eighth wonder of the world”. For example, over 20 years, an annualised return of 7% turns £1,000 into £3,869.68. An annualised return of 8%, however, turns that £1,000 into £4,660.96.

Starting value Annualised growth rate Holding period (years) End value
£1,000 5.0% 20 £2,653.30
£1,000 6.0% 20 £3,207.14
£1,000 7.0% 20 £3,869.68
£1,000 8.0% 20 £4,660.96
£1,000 9.0% 20 £5,604.41
£1,000 10.0% 20 £6,727.50
£1,000 11.0% 20 £8,062.31
£1,000 12.0% 20 £9,646.29
£1,000 13.0% 20 £11,523.09
£1,000 14.0% 20 £13,743.49
£1,000 15.0% 20 £16,366.54

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address: 27 Old Gloucester Street, London, WC1N 3AX.

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