Wise men ranging from Jeremy Grantham to Bill Gross to Jeffrey Gundlach have been telling the world to expect low returns from equities over the next five to seven years. No doubt, many advisors are relaying the same exact message to their clients.
Grantham, for one, relies on a formula that has large-cap U.S. equities trading at current levels for the next seven years. In his writings, the outspoken global investor has voiced reservations about the sustainability of U.S. profit margins.
There are other sound reasons behind the thinking. Populations in the developed world are aging, with nations like Japan and Italy expected to see shrinkage of 15% or more over the next several decades. When the demographic pyramid turns upside down, it places huge stresses on mature societies with generous entitlements.
The problem with the arguments of these eminent investors is that many asset classes have given investors low returns since the start of the century. Ironically, that’s not a revelation to most clients, but it is to some wise investors who constantly discuss the subject.
Low returns are a particularly problematic issue for global investors. From 2000 through 2015, the MSCI All Country World Index returned 2.9% annually. Between 2007 and 2015, the index returned 3.1% on an annual basis. More recently in 2014 and 2015, investors got a scant 0.9% from the global index.
There is no question that the American economy has outperformed other developed economies, as results reflect that. Over the decade ending July 20, the S&P 500 has generated 7.4% annually, close to its long-term average (these figures are from Vanguard’s index funds). That’s a lot better than Vanguard’s developed market index, which gave investors 1.9% annualized, or its emerging market index, which produced 3.5% annually over the last decade. But go back to January 2001, when the tech bubble burst but markets had yet to hit bottom and S&P 500 returns had been returning about 4.8%. For those advisors with longtime relationships, they know that good clients implicitly get this.
The results vary with the time frame one selects, but the outsized returns are obvious in another asset class. Vanguard’s long-term bond index fund, which combines government and corporate bonds, gave investors 8.4% annualized for the last decade. This asset class has been providing excess returns for more than three decades.
So while one can argue until the sun goes down whether equities are fairly valued or somewhat expensive, the problem lies elsewhere. And as Ariel Investments’ global equities guru Rupal Bhansali says, we live in an innovation society and equities are a warrant on mankind’s progress.
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