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New research from the Credit Suisse Research Institute and London Business School: the Credit Suisse Global Investment Returns Yearbook 2011
Experts from London Business School present new evidence on Swiss investment returns. They also reveal unexpected long-term profits from seeking high levels of equity income around the globe.Since 1900, investors in Swiss equities have increased their real (inflation-adjusted) wealth by a factor of 100, while this rises to 300 for Swiss investors who bought US stocks. Swiss stocks enjoyed comparatively low volatility. When held for periods of over 25 years, Swiss equities have always given a positive real return; this compares with 16 years for US equities, 55 for German, 66 for French and 73 years for Italian equities. These are among the key findings of the Credit Suisse Global Investment Returns Yearbook 2011, a flagship study produced for the Credit Suisse Research Institute.
The 2011 Yearbook reports substantial profits from strategies that aim to enhance income. This surprising evidence spans 21 countries and periods of up to 111 years. At a time when investors find it challenging to generate the income they need and when they are concerned about accelerating inflation, this new research is very topical.
The Global Investment Returns Yearbook 2011 is produced for the Credit Suisse Research Institute by London Business School professors, Elroy Dimson, Paul Marsh and Mike Staunton. They are the global authority on long-run investment returns.
Building on a database covering 111 years of financial market returns in 19 countries, from 1900 to date, the Credit Suisse Global Investment Returns Yearbook 2011 provides a definitive record of long-run investment returns. It puts the current outlook for asset prices in perspective as the global economic recovery gathers pace, and as inflation becomes a leading matter of concern to investors.
Giles Keating, Head of Private Banking Research at Credit Suisse, said: “We are proud to be associated with the work of Elroy Dimson, Paul Marsh and Mike Staunton, whose research has had a major impact. The Credit Suisse Investment Returns Yearbook is now widely read by investors.”
In the 2011 Yearbook, Elroy Dimson, Paul Marsh and Mike Staunton of London Business School examine three very relevant issues.
The experience of Swiss investors
Since 1900, Switzerland has had the world’s lowest inflation rate, its strongest currency, and one of the world’s best performing bond markets. Equity investors have also enjoyed solid returns. Since 1900, investors in Swiss equities have increased their real (inflation-adjusted) wealth by a factor of 100, an annualized real return of 4.2%. This represents an annualized risk premium of 3.4% over cash and 2.1% over long government bonds. While these numbers are somewhat below their global equivalents, Swiss equities have been less volatile than in most other markets. There were nevertheless two years in which Swiss equity investors lost more than 30% in real terms. Despite the historical strength of the Swiss franc, Swiss-based investors would have benefited from international diversification. A Swiss investor who purchased US stocks would have increased real wealth by a factor of 300, an annualized real return of 5.3%. Swiss investors who diversified globally would have earned an annualized real return of 4.5% with appreciably reduced risk.
Fear of falling bond markets
In “Fear of Falling”, the London Business School researchers question whether the decades-long bull market in fixed income can continue. They examine periods when there have been sharp falls, or drawdowns, in the real value of government bonds – typically during inflationary episodes – and how long these have persisted. From a cross-asset class point of view, this article investigates the correlations between bonds and stocks and how these have changed over time. They show how bond values have been eroded by inflation, but they demonstrate that investing in bonds, once inflation is established, can give rise to higher long-run real returns, thereby providing some compensation for the additional uncertainty about future purchasing power. They conclude that it would be fantasy to expect a continuation of the high real bond returns achieved since 1982.
The quest for yield
In “The Quest for Yield”, Elroy Dimson, Paul Marsh and Mike Staunton examine whether income, per se, should matter to equity investors, and focus on the contribution of income and long-run dividend growth to long-term stock returns. Within equity markets, they look at the performance of yield-tilt strategies, and at the risk and risk-to-reward ratios of different income-oriented approaches. They also look across markets to see whether higher-yielding countries have outperformed lower-yielding markets. In general, the authors highlight that investment strategies favoring stocks and markets with high-dividend yields tend to pay off handsomely over the long run for the patient investor.