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 )
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
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,
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
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
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
of institutional portfolios is a secular trend
between risk and return.
year) could be attributed to equity
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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
FA L L 2 0 1 0
11/27/2010 3:13:02 PM
Fall edition of the IBR magazine at the Wharton School.