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Investing in a low return world

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Professor Elroy Dimson presented his joint work with Paul Marsh and Mike Staunton at the Asset Management Conference 2013, organised by the LBS Investment Management Club.

Professor Elroy Dimson presented his joint work with Paul Marsh and Mike Staunton at the Asset Management Conference 2013, organised by the LBS Investment Management Club.

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  • 1. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 1Investing in a low-return worldElroy Dimson, London Business School(Joint work with Paul Marsh and Mike Staunton)
  • 2. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 202468US Jap UK Eur Wld US Jap UK Eur WldSince 1950 Since 1980Equities BondsAnnualizedreal returns on equities and bonds (%)Baby boomers TheirchildrenThe high-return world (we grew up in)Past performance conditions our thinking and aspirations02468US Jap UK Eur Wld US Jap UK Eur WldSince 1950 Since 1980Equities BondsAnnualizedreal returns on equities and bonds (%)Baby boomers Theirchildren02468US Jap UK Eur Wld US Jap UK Eur WldSince 1950 Since 1980Equities BondsAnnualizedreal returns on equities and bonds (%)Baby boomers Theirchildren
  • 3. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 3Falling yields generated a golden age for bonds10.42.512.52.70246810121900s 10s 20s 30s 40s 50s 60s 70s 80s 90s 2000s 10s End-2012USA UKAverageyields on long government bonds (%)To extrapolate the last 30 years’ bond returns would be fantasy
  • 4. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 4300 years of UK bond yields. What is “normal”?4.505101520Long-run averageThe high bond returns since 1980 were not “normal”
  • 5. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 5Real yields: The race to zero and beyond-10123400 01 02 03 04 05 06 07 08 09 10 11 12 13US UK Fra Ger Jap Can SweRealyield (%)Default-free, inflation-protected bonds now yield less than zero
  • 6. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 6Prospects for real asset returns Long-term index-linked bonds– zero or marginally negative Long-term conventional bonds– marginally positive Bills/cash (long-run, rolling)– marginally negative Equities– bills + equity premium vs billsBut do equity returns vary with the real interest rate?0.72.2-2.10.43.9-3.1-0.63.3-0.7-4-2021900–1980 1981–2008 2009–2012USA UK All YearbookAverageannual realinterestrate(%)
  • 7. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 7Equities next 5 years % p.a. Bonds next 5 years % p.a.Real asset returns versus real interest ratesReal interest rates impact real equity returns-1.73.0 3.03.94.87.08.911.5-6.6-1.91.73.35.07.6-11-2.20.11.52.94.89.4-15-10-50510Low 5% Next 15% Next 15% Next 15% Next 15% Next 15% Next 15% Top 5%Real interest rate boundary %Percentiles of real interest rates across 2,160 country-yearsReal rate of return (%)
  • 8. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 8Likely future returns0246Worldsince1950Worldsince1980World USA Japan UK Europe EmergingmarketsHistorical high returns Prospective lower returnsEquities BondsAnnualizedreal returns on equities and bonds (%)We are indeed living in a low-return world
  • 9. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 9Optimism and stressUnrealistic return projections asset managers’ targets pension plans, especially in US retail product projections automatic enrolment pensionsStresses from low returns DB pension plan deficits unfunded pension plans DC contribution rates saving rates generally charity/endowment spending rules pressure on management fees
  • 10. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 10The low return world Currently, investors’ prime concern Low yields have been obvious for some time– less obvious returns will be lower on all assets Some investors in denial– expect rapid return to “normal”– but period since 1980 not “normal” for bonds– second ½ of 20th century not “normal” for stocks– also, be careful what you wish for ... Our projections: long-run and fallible, but realistic Optimism misleads, and masks need for remedial actionThe Yearbook is downloadable from www.tinyurl.com/CSgiry2013
  • 11. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 11Concluding remarks We are in a low return world Investing has become more challenging Need to search for rewards that gobeyond just the equity premium Need to control risks, and to diversifyacross assets, markets, and premiaThe Sourcebook is available via www.tinyurl.com/DMSsourcebook

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