Equities Shine Over Far Horizons

Is there any risk free return left? No, investors need to take smart risk and that requires equities. James D Dilworth, CEO Allianz Global Investors Europe

Equities have created more wealth than top-rated government bonds and money market products over more than two centuries, proving a surprisingly safe long-term home for capital, says a new study from Allianz Global Investors.

Equities have generated positive real returns for every rolling 30-year period since 1800, the study found, based on the analysis of the data with respect to the US market. Shareholders received an average annual post-inflation return of 6.94% on that basis, falling between a low of 2.81% for 1903 to 1933 and a high of 10.63% from 1857 to 1887.

By contrast, investors have experienced periods of loss from fixed deposits or government bonds over the same timeframes. Zero interest rates saw US Treasuries achieve a maximum average annual real return of 7.44% for the period between 1981 and 2011, but Treasuries fell to a 2% loss from 1950 to 1980.

“Is there any risk free return left? No, investors need to take smart risk and that won’t work without any exposure to equities,” said James D. Dilworth, CEO of Allianz Global Investors Europe.

Dilworth adds that an investment horizon of 30 years is perhaps longer than most investors are used to, but argued that it was realistic given the challenges of retirement planning and wealth accumulation facing the next generation.

“If our great-great-great grandparents had invested $100 in an equity portfolio in 1871 the heirs of today would hold assets worth about $15m,” he says.

An investment of EUR 100 equivalent in the most highly liquid German companies in 1934, meanwhile, would be worth EUR 87,121, according to analysis by AllianzGI’s Capital Markets & Thematic Research team.

Tightening the horizon to rolling 10-year averages paints an even more compelling case for equities. Since 1800, the asset class delivered a maximum average real return of 16.84%, versus 12.41% for US Treasuries and 11.62% for US T-Bills. The 3.94% maximum loss incurred by equities in a 10-year period was also lower than the respective 5.36%and 5.08% equivalents for US Treasuries and US T-Bills. Equities are riskier, however, over shorter periods and when measured by annual fluctuation or volatility. Annual fluctuations for US equities ranged from a 38% loss in 1932 to a high of 66% in 1862.

Government bonds and money market securities were subject to less fluctuation, although investors have also incurred substantial losses on these instruments. Investors suffered a 22% loss on US Treasuries in 1864 and a 16% loss on T-Bills in 1948.

“It is quite simple. The longer the investment horizon, the better the risk-return profile of equities versus bonds,” Dilworth said. “ And the risk of owning fixed deposits and highly rated sovereign debt can only increase in the climate of financial repression and eventual interest rate rises that will drive down bond prices.”

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