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THE CULT IS DEAD: END OF THE AGE OF EQUITIES BY E L E N I S P I L I O P O U LO U (C ‘ 1 2 )

T

he most recent decade has been

or whether it is merely a cyclical product

will allocate to the assets with the most

unkind to equity investors.

of managers getting burned in the recent

attractive expected return per unit of

downturn.

Depending on the temporal

risk (this is a gross representation of

Professor Jeremy Siegel of the Wharton

nature of such a shift, signiÀcant impact on

much more refined concepts, beyond

School, has returned an average of 6.5%-

asset prices will follow.

the scope of this article). Therefore,

For

an asset class that, according to

7% per year in real terms since 1802, the

if either risk goes up (denominator)

pathetic return of 4% earned on global

or expected return (numerator) goes

equities is disheartening. To add insult

down, equities will look less attractive

to injury, the 1999-2009 decade has seen

to investors going forward.

two bear markets with a 50% drop in

Let’s start off with volatility, a common

value, according to Robert Buckland of

measure of risk in portfolios. David Laster

Citi. What this means in practice is that

and Kevin Cole of the FRBNY

investors earned a paltry return but had

evidence of increasing equity volatility

to withstand considerable volatility.

since the 1950s in the chart below. Laster

provide

Thus, after such a decade that ended

& Cole attribute this mainly to the then

with the start of the Great Recession,

(1996) record levels of the Dow coupled

one cannot blame institutional investors

with mean- reverting tendency in price

for implicitly declaring the end of what

volatility, which would result in a climb

Buckland calls the “Cult of Equity”.

back up to pre-WWII volatility levels, up

The

from a period of relatively low volatility.

phenomenon, which started around the

To illustrate the effect of increasing

1950s, when according to Buckland, a time of world prosperity and Markowitz’

So why would it be different this

volatilities in the context of portfolio

Modern Portfolio Theory ushered in an era

time? After all, the US equity markets

management, it is useful to assess the

of escalating allocations to equities, is now

have gone through drastic downturns

amount portfolio volatility that one can

being questioned. Buckland estimates that

since 1950, and yet, the Cult of Equity

attribute to equity volatility.

in 2006, 70% of US pension fund assets

has remained steadfast.

Montier of GMO LLC

were invested in equities compared with

tackle this question, we must first

since the 1980s, 90% of the volatility in

2009 allocations of 55%. The question that

understand that asset allocation is at

a portfolio comprised of 60% equity/40%

remains is whether such a “de-equitisation”

least in theory driven by a trade-off

bonds

of institutional portfolios is a secular trend

between risk and return.

year) could be attributed to equity

8

111210 hq.indd 8

I N T E R N AT I O N A L B U S I N E S S R E V I E W

In order to

Managers

(returning

James

estimates that

around

11%

per

FA L L 2 0 1 0

11/27/2010 3:13:02 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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