History Repeating: Are Equities Really Worth It?

(March 28, 2012) — Investors are becoming disillusioned with the performance of their equity portfolios, and questioning the validity of holding the relatively risky assets for little return, Russell Investments has said.

Since the start of this millennium, United States equities have risen 1.2% per year according to the Russell 3000 index, with international equities up only slightly more at 2.8% each year, shown by the MSCI World ex-US index.

On a dollar-invested basis – and with dividends reinvested – bonds fared better than both sets of equities.

A paper from Russell this week said: “As a result, disgruntled investors are questioning many of the traditional tenets of investing, including the role of equities, risk versus reward, and portfolio diversification.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Given such poor returns in the immediate past, investors, who Russell warns are often prone to having short memories, may be tempted to move out of the asset class entirely.

However, portfolio diversification remains key to a healthy exposure across all return-seeing assets and good risk management, the investment consulting firm said. They said as investors had only moved into equities relatively recently, they should stick with them.

The paper, by Mike Smith, consulting director for Russell, showed how over each decade since the 1970s a different asset class, from a choice of US and international equities, bonds and a 60/40 balanced portfolio, was the outperformer.

Socio-political and other natural events were often the major impetus for the outperformance, Russell said, showing that investors should be amply diversified to avoid being hit too hard in any instance and being able to take advantage elsewhere.

The paper said: “Both international stocks and bonds did much better than US stocks over the last dozen years. Still, it is impossible to predict the future. Market leadership can change abruptly, catching most by surprise. However, we may win by diversifying into asset classes that may not look attractive on the surface.”

Addressing the question of whether investors should move out of equities due to their recent poor performance, Russell said the asset class still offered good return potential and investors who had finally accepted it as a mainstay of a portfolio in the 1980s should stick with it.

“In reality, it took the two strong decades of the 70’s and 80’s to get investors to consider them seriously. Now they are a portfolio fixture, and deserve to be, along with fixed income and other diversifiers.

The paper concluded: “Diversification does not assure a profit and does not protect against loss in declining markets.”

It said that diversification in a portfolio allowed for returns with relatively low volatility.

“Lower volatility enables investors to stick with their plans and not chase last year’s winners because they already have some of what won. In addition, they own some of what may win next year. That’s a portfolio that can work for your clients over their investment horizon.”

(March 27, 2012) — Investors are taking a firmer grip on the management of the companies in which they hold stakes, several initiatives announced this week have shown.

This morning the National Association of Pension Funds (NAPF) launched a scheme under which pension fund investors will conduct open dialogue with some of the largest listed companies in the United Kingdom over their executive pay arrangements.

The initiative, co-led with Hermes Equity Ownership Services (EOS), has already seen 44 of these top 100 companies meet with a similar number of pension funds to discuss measures that could better align both sets of interests.

David Paterson, Head of Corporate Governance at the NAPF, told reporters this morning: “Through these working groups we can improve links between companies and pension schemes and improve the quality of dialogue between the two parties.”

For more stories like this, sign up for the CIO Alert newsletter. 

Paterson said the programme was set out for the long term and would allow investors to understand what drives remuneration at large companies.

“This is a long-term game that requires dialogue that will lead to positive change and if we don’t start now we will miss the opportunity that the recession has brought,” he said.

Paterson also said there had been a significant upturn in executive pay over the last decade, but the process had started much before that.

The initiative echoes moves by the UK’s Government Department for Business, Innovation and Skills, which this month called for investors to have tighter control of the executive remuneration at the companies in which they hold shares.

The Kay Review on the UK’s equity markets has also reported there should be closer cooperation between companies and their ultimate owners to improve efficiency and returns for shareholders.

Elsewhere, asset manager Aviva Investors reported that the majority of global stock exchanges were committed to promoting greater corporate responsibility on sustainability issues.

However, Aviva said that despite over three quarters of exchanges accepting it was their responsibility to promote these issues, they were restricted in what they were legally allowed to do.

An even higher number, over 80%, said they would welcome a global approach to consistent and material corporate sustainability reporting, suggesting a common framework may need to be built among policymakers at the global level.

Paul Abberley, Chief Executive of Aviva Investors London, said: “Exchanges play a vital role in the move towards more sustainable capital markets as they have the opportunity to influence and monitor companies seeking to access equity markets. So it’s encouraging to see that they recognise this responsibility although it is disappointing that so many failed to consider the implementation of mechanisms to promote sustainability disclosure through changes to listing rules.”

Abberley said he realised exchanges needed further support from asset owners and their managers – along with regulators and legislators – to push the issue forward.