Long-run global asset returns yield lessons for investors today

23 Feb 2017

New study by LBS authors traces investment returns from 1900


ElroyPaulMike GIRY17
Equity investors should not fear modest rises in inflation and should note that smart beta has outperformed historically, according to London Business School authors of the Credit Suisse Global Investment Returns Yearbook 2017, which was published this week.

The authors of the Yearbook, Elroy Dimson, Paul Marsh and Mike Staunton of London Business School, document the long-run return since 1900 on stocks, bonds, bills, inflation and currencies in 23 countries and three regions.

Their main findings are:
• Equity investors should not fear modest rises in inflation
• Real interest rates remain low so all assets are likely to experience lower returns than in the past
• The risk premium from investing in equities is also likely to be lower
• Smart beta has outperformed historically, but can be challenging to implement

Commenting on the Yearbook findings, Mike Staunton, Director of the London Share Price Database at London Business School, said: “Over the period since 1900, global equities outperformed cash by 4.2% per year. Looking ahead, we expect a lower premium in the range 3 to 3.5%.”

Paul Marsh, Emeritus Professor of Finance at London Business School, adds: “Furthermore, in today’s low interest rate environment, expected returns from investing in shares and all other assets are much lower than a decade ago. Inflation expectations have risen recently, but based on historical precedent, we do not expect modest rises in inflation to adversely impact the real return on shares."

The 2017 Yearbook – which is published by the Credit Suisse Research Institute – provides extensive evidence on factor (or “smart beta”) investing. The idea is to harvest the long-run factor premiums discovered and popularised by academic researchers. The authors present long-run, multi-country estimates of the incremental returns to investing in stocks that are small, value-oriented, high-yielding, have favourable momentum, or are low-volatility.

Elroy Dimson, Emeritus Professor of Finance at London Business School and Chairman of the Newton Centre for Endowment Asset Management at Cambridge University, said: “Smart beta investing raises the question of whether a pattern in past returns will persist into the future. While the long-term numbers are reassuring, the investor should not be complacent. After publication and after the investment opportunity has been popularised, the rewards to smart beta strategies are considerably reduced.”

The Yearbook analyses the historical and prospective risk premium from investing in equities globally, as well as the long-run returns from factor investing. The countries included in the Credit Suisse Global Investment Returns Yearbook represent 98% of the global equity market in 1900 and 91% of the investable universe for a global investor at the start of 2017.