Report Warns Expecting Continued Stellar Bond Performance 'Would Be Fantasy'

(February 9, 2011) — An annual report by the London Business School and Credit Suisse has shown bond outperformance is not likely to continue.

The academic report — written by London Business School finance professors Elroy Dimson, Paul Marsh and Mike Staunton — found the annualized real return for the 11 years ended December 31 for US bonds was 5.4%, compared with -1.2% for stocks. The study found that over the long-run, equities have outperformed inflation, bonds, and cash in every market examined. While UK equities have recovered 87% and emerging markets by 150% since March 2009, neither US nor UK equities have fully rebounded to their pre-crisis peaks.

In the 111 years ended December 31, the study found that US equities returned an annualized average 6.3% vs. 1.8% for bonds. Globally, stocks returned 5.5% vs. 1.6% for bonds. Cash returned 1% for the period.

The study provided data stretching back to 1900, covering bills, bonds, currencies, inflation and stocks, covering 19 countries in Africa, Asia, Europe and North America.

“We are struck by the volatility of the size, value and momentum effects,” Elroy Dimson, Leverhulme Emeritus Fellow and Emeritus Professor of Finance, commented in a statement. “Over the long term, all three factors have provided a positive risk premium. But over shorter intervals, these premia can easily go into reverse.”

The study supports recent moves made by global bonds guru Bill Gross, chief investment officer of PIMCO. In June of last year, Gross revealed that he would be making a transition into equities. “We are recognizing that the global marketplace is not just bond-oriented, and so equities have a place, always have had a place,” he told CNBC. Mohamed El-Erian, CEO of PIMCO, who popularized the phrase “new normal” to describe how growth will be depressed by consumer retrenchment and tighter financial regulation, has said the Fed’s purchase of Treasuries will lead to faster global inflation while failing to revive US economic growth. Thus, he has warned that investors should expect lower-than-average historical returns with greater regulation, lower consumption, slower growth, and a shrinking global role for the US economy.

PIMCO has adjusted to a new normal by offering equity funds to investors in April, while moving into stocks to allow customers to diversity their holdings as areas such as emerging markets outperform other regions.