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.

1. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 1
Investing in a low-return world
Elroy 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 2
0
2
4
6
8
US Jap UK Eur Wld US Jap UK Eur Wld
Since 1950 Since 1980Equities Bonds
Annualizedreal returns on equities and bonds (%)
Baby boomers Theirchildren
The high-return world (we grew up in)
Past performance conditions our thinking and aspirations
0
2
4
6
8
US Jap UK Eur Wld US Jap UK Eur Wld
Since 1950 Since 1980Equities Bonds
Annualizedreal returns on equities and bonds (%)
Baby boomers Theirchildren
0
2
4
6
8
US Jap UK Eur Wld US Jap UK Eur Wld
Since 1950 Since 1980Equities Bonds
Annualizedreal 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 3
Falling yields generated a golden age for bonds
10.4
2.5
12.5
2.7
0
2
4
6
8
10
12
1900s 10s 20s 30s 40s 50s 60s 70s 80s 90s 2000s 10s End-
2012
USA UK
Averageyields 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 4
300 years of UK bond yields. What is “normal”?
4.5
0
5
10
15
20
Long-run average
The 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 5
Real yields: The race to zero and beyond
-1
0
1
2
3
4
00 01 02 03 04 05 06 07 08 09 10 11 12 13
US UK Fra Ger Jap Can Swe
Realyield (%)
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 6
Prospects 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 bills
But do equity returns vary with the real interest rate?
0.7
2.2
-2.1
0.4
3.9
-3.1
-0.6
3.3
-0.7
-4
-2
0
2
1900–1980 1981–2008 2009–2012
USA UK All Yearbook
Averageannual real
interestrate(%)

7. Copyright © 2013 Elroy Dimson, Paul Marsh and Mike Staunton, London Business School LBS Asset Management Conference, Friday 19 April 2013 Slide 7
Equities next 5 years % p.a. Bonds next 5 years % p.a.
Real asset returns versus real interest rates
Real interest rates impact real equity returns
-1.7
3.0 3.0
3.9
4.8
7.0
8.9
11.5
-6.6
-1.9
1.7
3.3
5.0
7.6
-11
-2.2
0.1
1.5
2.9
4.8
9.4
-15
-10
-5
0
5
10
Low 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-years
Real 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 8
Likely future returns
0
2
4
6
World
since
1950
World
since
1980
World USA Japan UK Europe Emerging
markets
Historical high returns Prospective lower returns
Equities Bonds
Annualizedreal 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 9
Optimism and stress
Unrealistic return projections
 asset managers’ targets
 pension plans, especially in US
 retail product projections
 automatic enrolment pensions
Stresses 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 10
The 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 action
The 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 11
Concluding remarks
 We are in a low return world
 Investing has become more challenging
 Need to search for rewards that go
beyond just the equity premium
 Need to control risks, and to diversify
across assets, markets, and premia
The Sourcebook is available via www.tinyurl.com/DMSsourcebook