Schroders questions shift from equities to bonds
UK – Stock market history does not support the current trend in the UK that favours investments in fixed income over equities, claims new research from Schroders.
The report, Investment Perspectives, suggests that there has been a change in investor attitudes towards equities in recent years, especially among pension funds. It highlights the concerns felt over the effect that the new FRS17 accounting principle will have on balance sheets, as well as concerns over future market performance, given the recent fall of stock markets and earnings.
But the research shows that there have only been two periods in history when bonds have outperformed equities – during the depression of the 1930s and the oil crisis of the 1970s.
Blame for the relatively poor performance of the equity markets during these periods is predominantly put on declines in corporate profitability, with deflation in the 1930s and rising oil prices and labour costs in the 1970s also coming under fire.
Nevertheless Schroders says that over the last 100 years the excess returns from equities over bonds has averaged 5% per year and equity returns during both the 1980s and 1990s were far superior to those of bonds. The research believes that this provided more than adequate compensation for any increased risk taken by investors.
Schroders’s research believes that there will be a decline in the return ratio between equities and bonds, but equities will continue to do better. Schroders revised figures puts the excess returns for equities at 3% per year, which it considers to be a reasonable margin.
The sudden switch by the Boots pension fund from equities to bonds is a unique case, says Schroders, as it was fortunate enough to have a large surplus to sustain the move. Moreover, it was a large fund compared with the company’s market capitalisation.
Moves of this type are also sensitive to market timing and Schroders believes that following a period of outperformance by bonds, the potential gains are likely to be less.
Schroders is confident equities remain a suitable long-term investment class for pension funds.