In collaboration with London Business School and Cambridge University professors, the Credit Suisse Global Investment Returns Yearbook is the authoritative guide to historical long-run returns. It now provides 120 years of data on stocks, bonds, bills, inflation and currency for 23 national markets and for the world as a whole. The 2020 edition of the Yearbook includes a new, dedicated chapter on environmental, social and governance (ESG) investing.
Taking the long view
- Equities remain the best long-run financial investment ahead of bonds and bills. Over the last 120 years, global equities have provided an annualized real (i.e., after inflation) return of 5.2% versus 2.0% for bonds and 0.8% for bills.
- Over the last decade, global equities performed especially well with an annualized real return of 7.6% compared with a still robust real return of 3.6% from bonds.
- Since 1900, global equities have outperformed bills by 4.3% per annum. The terminal wealth from investing in stocks would have been 165 times larger than from bills.
- Prospectively, the authors estimate that the equity risk premium will be 3½%, a little lower than the historical figure of 4.3%, but still implying that equity investors can expect to double their money relative to short-term government bills over 20 years.
- The USA remains the world’s largest equity market by a huge margin, and today accounts for over 54% of the world’s investable, free-float market capitalization. Japan (7.7%) is in second place, ahead of the UK (5.1%) in third place, and China (4.0%) in fourth position.
- Interest rates remain exceptionally low in both nominal and real terms. The Yearbook shows that when real rates are low, future real returns on all assets tend to be lower. The authors stress that investors should therefore take a realistic view of likely future asset returns. With real interest rates around zero, the expected return on stocks is just the equity risk premium.
- Investors are increasingly concerned about ESG (environmental, social and governance) issues and asset managers are under pressure to show they invest responsibly. The Global Sustainable Investment Alliance report shows that investment products linked to ESG had a total value in 2018 of USD 31 trillion. Today, the figure is probably closer to USD 40 trillion.
- The authors review the large body of research on ESG investing. They ask whether ESG investing enhances return, or whether it involves sacrifice. They conclude that, while on balance, there is no unambiguous evidence that ESG enhances risk-adjusted returns, there is equally no evidence that investors need to pay a high price for their principles.
In the Yearbook, Professor Elroy Dimson, from Cambridge University and Professor Paul Marsh and Dr Mike Staunton of London Business School assess the returns and risks from investing in equities, bonds, cash and currencies in 23 countries and three different regions since 1900. They also examine the industrial transformation that has taken place since 1900, alongside the parallel transition in markets as countries have moved from emerging to developed status. They also review factor investing and the profitability of different investment styles.
- ESG-managed investments had reached almost USD 31 trillion by start-2018, a 34% increase over two years. Europe was the leading region for ESG investment, with 46% of the total versus 39% for the USA. However, ESG investing in the USA was growing faster at 38% over the prior two years versus 11% in Europe.
- ESG investing takes many forms. One distinction is between “exit” or divestment, based on ethical screening, and using “voice” through engagement.
- Of the seven broad ESG strategies identified by the Global Sustainable Investment Alliance, negative/exclusionary screening is the largest ESG category worldwide (and in Europe), representing 36% of the global total.
- Traditional exclusions were of so-called sin stocks, such as tobacco, alcohol and gambling. Historically, these have performed well, so excluding them involved sacrifice. However, recent research shows that sin stock returns can be explained by factor returns. Investors can compensate for their exclusion by choosing “virtuous” stocks with the same factor exposures.
- Sin stocks have only a small weighting in the world index. But there is increasing pressure from investors to make large-scale exclusions. Climate change is leading to demands that fossil fuel stocks be excluded from portfolios.
- In new research, the authors show that blacklisting entire, large sectors would not historically have had a major impact on the risk-adjusted return at the overall portfolio level. However, the marginal impact can be quite large – positive or negative - over particular time-periods.
- Investors today want access to information on the carbon exposure of their investee companies. This is essential if they are to exert influence. It is less clear, however, whether this information is linked to investment performance. The authors conclude that there is no convincing evidence yet for there being a carbon anomaly or pricing factor in stock returns.
- ESG ratings are the basic toolkit for ESG investing. The authors show that there is little relationship between the ESG appraisals for a given stock by different agencies. The correlations are astonishingly low. At best, ESG ratings are a starting point, and investors need to understand them and supplement them with their own scrutiny.
- Good governance matters and impacts corporate performance. On environmental and social issues, there can be large costs to social irresponsibility. More positively, investing in intangibles such as reputation, trust and good citizenship can add value for shareholders.
- However, unlike corporate governance, improvements addressing environmental and social issues can require large investments, which do not automatically add value. Companies do not automatically do well financially by doing good.
- Investing in companies with high ESG credentials has historically brought benefits, but the evidence indicates these have been short-lived. Investors learn, the information gets impounded in valuations, and markets become more efficient.
- There is a wide body of literature with sometimes conflicting results on the performance impact of ESG-investing depending on time-periods and approaches chosen but there is no unequivocal evidence yet showing that ESG funds outperform on a sustained basis. Most studies find neutral to mildly negative relative performance. Similarly, on average, ESG indices appear to show neutral performance.
- Active ownership strategies are on average rewarded with a worthwhile increase in the value of the target company, especially when engagements are coordinated with other organizations that hold shares in the same business. From a worldwide perspective, the dispersed ownership model varies across countries, and this strengthens the case for taking an international approach to engaging with companies on ESG issues.
- 2019 was a superb year for equities, with the Yearbook world index returning 28% (measured in USD). The best performing market was Russia, with a USD return of 56%, with Switzerland in second place with 33%. The US equity market gave a return of 30%.
- Real equity returns since 2000 have been acceptable, but below their historical averages, despite the strong recovery since 2009. This period, with two major bear markets, including the Global Financial Crisis, has provided a timely reminder of the risk involved in equity investment.
- Over the 120 years since 1900, equities have outperformed bonds, bills and inflation in all 21 countries. For the world as a whole, equities outperformed bills by 4.3% per year and outperformed bonds by 3.1% per year.
- However, after adjusting for non-repeatable factors that favored equities in the past, the authors infer that investors expect a global equity premium (relative to bills) of around 3½% on a geometric mean basis and, by implication, an arithmetic mean premium of approximately 5%.
- Despite very low start-year yields, bonds also performed well in 2019, with returns of 12% in the USA, 9% in the UK and Switzerland, and just over 10% (in USD terms) on the world index.
- Looking ahead, the authors expect long-term bond returns to be much lower, in line with their current yields.
- Investors in long-term bonds require a maturity premium for the greater volatility and inflation risk of investing in long-term bonds. A reasonable forward-looking estimate of the long-run maturity premium is approximately 1% per year.
- Investors require a credit risk premium for investing in bonds that could in principle default. The credit premium clearly depends on the quality of the bond and the likelihood of default, but for long-term high-grade US corporate bonds, the historical premium has been 0.73% per year.
- Factor returns remain a major influence on performance. The Yearbook shows long-run returns on five factors that have exhibited premiums both over the long-run and across countries, namely, size, value, income, momentum and low volatility.
- The value style has performed poorly in recent years, and this continued in 2019, albeit with some glimmer of hope from late summer. In the USA, value stocks have now underperformed growth stocks over the last 31 years.
- In the 12 years from the financial crisis, and focusing on the five factor premiums in both the UK and the USA, only half of the 120 “premiums” were positive. Looking ahead, while the authors stress the continuing importance of factor effects, they caution that factor premiums are by no means assured.
Richard Kersley, Head of Thematic Research, Global Markets at Credit Suisse said: “A thorough understanding of the nature of long run investment returns over time is essential when forming views of what the future may hold. Partnering with our expert authors, we’re delighted to provide our clients with a wholly unique perspective of 120 years of investment returns to help their decision making.”
Nannette Hechler-Fayd’herbe, Chief Investment Officer International Wealth Management and Head of Economics and Research at Credit Suisse commented: “This year we have included analysis of ESG investing, a growing phenomenon in the context of broadening global environmental concern. While investors want increasingly to align their investments to their values and convictions, they also require transparency on whether ESG investing adds value or reduces risk or whether there is investment sacrifice associated."
The authors, Elroy Dimson, Paul Marsh and Mike Staunton, added: “While ESG investing is relatively new, it is clearly of crucial importance. We find that, contrary to what is often claimed, ESG investing does not involve any significant sacrifice of risk-adjusted return.”
The countries included in the Yearbook represented 98% of the global equity market in 1900 and still represent over 91% of the investable universe at the start of 2020. The report also includes a world index, world ex-USA and Europe index for equities and bonds. The Global Investment Returns Yearbook consists of five main sections, the first four focusing on long-run asset returns, risk and risk premiums, ESG investing and factor investing, while the fifth contains individual assessments on the 23 countries and three regions which remain core to the Yearbook.
A summary copy of the book is available for free download here.
Imran Javaid, Credit Suisse, email@example.comfirstname.lastname@example.org, +44 207 883 0651
Kate Harrison, London Business School
+44 207 000 7048/+44 207 000 8667