Discretion pays for traders

In South Africa the real value of equities, with income reinvested, grew by a factor of 2,925. Australian figures are similar, while the US is third, returns multiplying almost a thousand-fold.

Real Austrian returns grew by only a factor of two, however. Italy (seven) France (27), Germany (30) are way below the European average (106), which is itself below the global average (249).

And Ireland? Between 1987 and 2006, Ireland enjoyed the second-highest returns of any country, before collapse ensued. Since 1900, real returns grew by a factor of 71, well below the UK (316). Annualised returns average 3.8 per cent compared with 1.2 per cent for bonds and 0.7 per cent for bills.

The yearbook can be found at investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

Expectations of wealth from stocks ‘delusional’

Stock market returns are lower than investors believe, and future returns are likely to be below average, according to the Credit Suisse Global Investment Returns Yearbook 2013, which examines equity returns in 22 markets, including Ireland, between 1900 and 2012.

Many assume the equity risk premium – equities’ excess return over risk-free rates – to be more than 6 per cent. Globally it has been just 4.1 per cent since 1900, the yearbook finds.

Equity investors have been “lucky” since 1950, with real global returns of 6.8 per cent. Bond investors, too, have been fortunate, earning real annual returns of 6.4 per cent since 1980.

Today, however, we are living in a “low-return world” of rock-bottom interest rates. Adjust for non-repeatable factors and the equity risk premium is likely to fall to between 3 per cent and 3.5 per cent in the next 20 to 30 years.

At the yearbook’s London launch Prof Paul Marsh warned that fund management fees of between 1 per cent and 1.5 per cent are unsustainable as they will be “gobbling up half of the return”.

Yet US pension funds expect to achieve real returns of 7.6 per cent. With their proportion of equities falling to 48 per cent, they would need to achieve nominal returns of 12.5 per cent.

Projected pension returns in the UK are lower (6.1 per cent) but the implied return from equities is still “greatly above the level we deem plausible”.

“To assume that savers can confidently expect large wealth increases from investing over the long term in the stock market – in essence, that the investment conditions of the 1990s will return – is delusional,” the report warns.