UK - Bonds have outperformed equities for the third year in a row, the latest Barclays Equity Gilt Study shows.
UK equities delivered a negative real return of 24.5% in 2003, while gilts returned 6.7%, corporate bonds 6.6% and index-linked gilts 5.1%.
Worse still, equities have now underperformed gilts over a full 10-year period – returning an average annual return of only 3.9% against 7.2% for gilts and a massive 8.6% for corporate bonds.
Over a much longer 20-year period, equities performed slightly better and returned 8.2% – while gilts only grew by 6.6% over the same period.
Average dividend growth over the past five years has also fallen to -2.7% – raising the risk of holding equities.
This average hides the fact that dividend income grew in 2002 for the first time since 1988.
The Barclays report explained that the discovery of a widespread tendency for management teams to misstate, or even misappropriate, profits in several companies led to a “substantial reaction” by investors, which necessitated a rise in equity yields.
The report also argues that UK pension schemes are still over-invested in equities.
Barclays says that as UK pension schemes are very mature – with only about a third of pension schemes members currently active – it becomes less appropriate to hold bonds as the worker approaching retirement has less time to recoup any losses that could result from taking equity risk.
The study also pointed out that there is a high contingent risk in pension schemes investing in equities – because any slump in equities usually comes at a time when corporate profitability is low and when firms can least afford to pay additional contributions.
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