Credit Suisse Global

lnvestment Peturns
Yearbook 2011
February 2011
Rosourch Inst|tute
Thought |eadersh|p from Cred|t Su|sse Pesearch
and the wor|dŒs foremost experts
Contents
5 Fear of fa|||ng
15 The quest for y|e|d
25 Market-|mp||ed returns. Past and present
31 Country prof||es
32 Aus¦ru||u
33 Bo|g|um
34 Cunudu
35 Donmurk
36 F|n|und
37 Frunco
38 Oormuny
39 lro|und
40 l¦u|y
4! Jupun
42 No¦hor|unds
43 Now Zou|und
44 Norwuy
45 Sou¦h Aír|cu
46 Spu|n
47 Swodon
48 Sw|¦.or|und
49 Un|¦od K|ngdom
50 Un|¦od S¦u¦os
5! Wor|d
52 Wor|d ox-US
53 Europo
54 Authors
55 Impr|nt / D|sc|a|mer
For more |nformat|on on the f|nd|ngs
of the Cred|t Su|sse G|oba| Investment
Peturns Yearbook 2011, p|ease contact
e|ther the authors or.
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uccompuny|ng Sourcobook, soo pugo 55.
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CREDlT SUlSSE OLOBAL lNvESTMENT RETURNS YEARBOOK 20!!_2
Introduct|on
Tho Crod|¦ Su|sso O|obu| ln»os¦mon¦ Ro¦urns Yourbook 20!! pro»|dos
!!! yours oí du¦u on í|nunc|u| murko¦ ro¦urns |n !9 coun¦r|os, írom
!900 ¦o du¦o, muk|ng |¦ ¦ho doí|n|¦|»o rocord on |ong-run murko¦ ro¦urns,
und ho|p|ng ¦o pu¦ |n¦o con¦ox¦ ¦ho curron¦ ou¦|ook íor usso¦ pr|cos us
¦ho g|obu| oconom|c roco»ory gu¦hors puco.
Tho Yourbook |s comp|omon¦od by ¦ho Crod|¦ Su|sso O|obu| ln»os¦-
mon¦ Ro¦urns Sourcobook, wh|ch ox¦onds ¦ho scu|o oí ¦ho unu|ys|s ¦o un
oxum|nu¦|on oí |n»os¦mon¦ s¦y|os und con¦u|ns do¦u||od ¦ub|os, chur¦s,
||s¦|ngs, buckground, sourcos und roíoroncos íor o»ory coun¦ry.
Moro spoc|í|cu||y, s|nco ¦ho pub||cu¦|on oí ¦ho 20!0 Yourbook, ¦ho
g|obu| bus|noss cyc|o hus shown cons|dorub|o |mpro»omon¦, und |ní|u-
¦|on ru¦hor ¦hun doí|u¦|on |s now ¦ho |oud|ng |ssuo oí concorn íor |n»os-
¦ors. ln ¦h|s con¦ox¦, E|roy D|mson, Puu| Mursh und M|ko S¦uun¦on oí
¦ho London Bus|noss Schoo| oxum|no ¦wo »ory ro|o»un¦ |ssuos.
F|rs¦, ío||ow|ng ¦ho docudos-|ong bu|| murko¦ |n í|xod |ncomo s|nco
!982, ¦hoy usk who¦hor |n»os¦ors shou|d now bo íouríu| oí íu|||ng
bonds. Th|s ur¦|c|o oxum|nos por|ods whon ¦horo hu»o boon shurp íu||s,
or druw-downs, |n go»ornmon¦ bonds und how |ong ¦hoso hu»o por-
s|s¦od. From u cross-usso¦ c|uss po|n¦ oí »|ow, ¦h|s ur¦|c|o u|so |n»os¦|-
gu¦os corro|u¦|ons bo¦woon bonds und s¦ocks und how ¦hoso hu»o
chungod o»or ¦|mo. Thoy í|nd ¦hu¦ bond druwdowns ¦ond ¦o bo worso |n
|ní|u¦|onury por|ods.
Tho nox¦ ur¦|c|o íocusos on ¦ho Ŕquos¦ íor y|o|dŕ whoro |¦ oxum|nos
who¦hor |ncomo, por so, shou|d mu¦¦or ¦o oqu|¦y |n»os¦ors, und íocusos
on ¦ho con¦r|bu¦|on oí |ncomo und |ong-run d|»|dond grow¦h ¦o |ong-¦orm
s¦ock ro¦urns. W|¦h|n oqu|¦y murko¦s, |¦ |ooks u¦ ¦ho poríormunco oí
y|o|d-¦||¦ s¦ru¦og|os, und u¦ ¦ho r|sk und r|sk-¦o-rowurd ru¦|os oí d|ííoron¦
|ncomo-or|on¦od upprouchos. ln gonoru|, ¦ho uu¦hors h|gh||gh¦ ¦hu¦
|n»os¦mon¦ s¦ru¦og|os íu»or|ng h|gh-d|»|dond-y|o|d|ng oqu|¦|os ¦ond ¦o
puy oíí hundsomo|y |n ¦ho |ong run.
ln u ¦h|rd ur¦|c|o, ¦ho Yourbook ¦ukos u d|ííoron¦, murko¦-busod »|ow
on r|sk prom|u by usk|ng whu¦ d|scoun¦ ru¦os uro |mp||od by curron¦ mur-
ko¦ |o»o|s. Du»|d Ho||und, Son|or Ad»|sor ¦o Crod|¦ Su|sso und Bryun¦
Mu¦¦hows oí HOLT, uso our propr|o¦ury HOLT írumowork ¦o quun¦|íy
whu¦ oqu|¦y murko¦s uro curron¦|y pr|c|ng |n. Thoy conc|udo ¦hu¦, |n ¦ho
cuso oí do»o|op|ng und rosourco-r|ch murko¦s, íu¦uro grow¦h und op¦|-
m|sm uro u|roudy omboddod |n murko¦ oxpoc¦u¦|ons. Mu¦uro, do»o|opod
murko¦s |ook u¦¦ruc¦|»o |n compur|son.
Wo uro proud ¦o bo ussoc|u¦od w|¦h ¦ho work oí E|roy D|mson, Puu|
Mursh, und M|ko S¦uun¦on, whoso book Tr|umph oí ¦ho Op¦|m|s¦s
(Pr|nco¦on Un|»ors|¦y Pross, 2002) hus hud u mu¸or |ní|uonco on |n»os¦-
mon¦ unu|ys|s. Tho Yourbook |s ono oí u sor|os oí pub||cu¦|ons írom ¦ho
Crod|¦ Su|sso Rosourch lns¦|¦u¦o, wh|ch ||nks ¦ho |n¦ornu| rosourcos oí
our ox¦ons|»o rosourch ¦oums w|¦h wor|d-c|uss ox¦ornu| rosourch.
G||es Keat|ng Stefano Nate||a
Houd oí Rosourch íor Pr|»u¦o Houd oí O|obu| Equ|¦y Rosourch,
Bunk|ng und Asso¦ Munugomon¦ ln»os¦mon¦ Bunk|ng
CREDlT SUlSSE OLOBAL lNvESTMENT RETURNS YEARBOOK 20!!_3
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CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _5
Over the long haul, equities have beaten inf lation,
they have beaten treasury bills, and they have
beaten bonds. And as we show in this Credit
Suisse Global Investment Returns Yearbook, the
same pattern has been repeated in every market
f or which we have long- term data. With 111 years
of returns f or 19 Yearbook countries, representing
almost 90% of global stock market value, we can
be conf ident of the historical superiority of equi-
ties. In the USA, f or example, equities gave an
annualized total return over the 111 years of
6.3% in real terms, f ar ahead of the 1.8% real
return on government bonds
Yet that superiority has been dented by the
striking perf ormance of bonds over intervals that
exceed the investment horizon of most individuals
and institutions. Looking back f rom 2011, bond
investors have enjoyed several decades of out-
standing perf ormance. The Credit Suisse Global
Investment Returns Sourcebook is the companion
volume to this Yearbook. The Sourcebook reports
that f or the USA, over the period f rom the start of
1980 to the end of 2010, the annualized real
(inf lation adjusted) return on government bonds
was 6.0%, broadly matching the 6.3% long- term
perf ormance of equities. Over the preceding 80
years, US government bonds had provided an
annualized real return of only 0.2%.
Similarly, f or the UK, f rom 1980 to 2010 the
annualized real return on government bonds was
6.3%. Over the preceding 80 years, UK govern-
ment bonds had provided an annualized real return
of just –0.5%. While equities have disappointed in
recent times, bonds have exceeded most inves-
tors’ expectations. Bonds – the lower risk asset –
have met or exceeded the perf ormance of risky
equities. Af ter such a good run, investors are wary
that bond prices could f all. In this article, we
theref ore examine the extent to which bonds
expose investors to potentially large drawdowns
on their portf olios. We examine the correlation
between stocks and bonds, which underpins the
role of bonds in a balanced portf olio. Finally, with
inf lationary concerns in the ascendancy, we exam-
ine the impact of both unexpected and expected
inf lation on real bond returns.
Ri sk and ret urn
For each of our 19 countries, we plot the realized
equity risk premium, relative to government bonds,
over the entire Yearbook history and f or the sub-
Fear of falling
After a decade with two savage bear markets, investors are wary of equities.
Government bonds have been a bright spot, but capital values could fall. This
article examines how far government bonds can decline, investigates the role of
bonds as a diversifier, shows how the crucial stock- bond correlation has
changed over time, and compares the performance of corporate, long- and mid-
maturity government bonds, and Treasury bills. A global study of government
bonds reveals the pain and potential reward from exposure to inflation risk.
El roy Di mson, Paul Marsh and Mi ke St aunt on, London Business School
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _6
period since 2000. These premia are depicted in
Figure 1. In blue, we show the annualized equity
risk premia that were achieved over the last 111
years. In red, we show the annualized risk premia
that were realized over the 11 years f rom the start
of 2000 to the end of 2010 – every red bar being
smaller than the long- term premium in blue.
Over the very long term, equities perf ormed
better than bonds, and the blue bars are all posi-
tive with an average premium of 3.8% per annum.
But f rom the start of the new century, equities
were superior to bonds in only f our countries –
three of which were resource rich economies. For
15 of the 19 countries, equities underperf ormed
bonds. On average, the realized equity risk pre-
mium versus bonds over 2000–10 was –3.2% per
year. As is apparent in the country prof iles (see
page 31), government bonds have so f ar tended
to be the asset of choice in the 21st century.
One interpretation of this outcome is that the
reward f or equity investing has disappeared, and
that bonds have a continuing attraction f or inves-
tors. An alternative view is that bonds have be-
come expensive, and that investors should be
concerned about the possibility of capital losses.
This raises the question of how large the losses
can be f rom equities and f rom bonds.
Invest or basophobi a
Basophobia, or f ear of f alling, is an ailment that
of ten af f licts investors. They are concerned about
buying at the top, and then experiencing a dra-
matic f all in the value of their purchase. One way
to express this is to measure the drawdown in
value, relative to a portf olio’ s running maximum
value or high- water mark. The drawdown is de-
f ined as the dif f erence between the portf olio’ s
value on a particular date and its high- water mark.
The interval f rom the date of the high- water mark
to breaching the high- water mark again is the
recovery period. The investment is said to be
underwater f rom the date of the high- water mark
to the end of the recovery period.
A crucial question is how deep portf olio draw-
downs can be, and how long it takes to recover
f rom them. To answer this question, we compute
the cumulative percentage decline in real value
f rom an index high to successive subsequent
dates. This indicates just how bad an investor’ s
experience might have been if the investor had the
misf ortune to buy at the top of a bull market. As
we shall see, although equities have provided a
higher return than bonds, they can experience
deeper drawdowns – yet there have also been
long intervals of deep bond drawdowns. All returns
include reinvested dividends and, unless stated to
the contrary, are in real (inf lation adjusted) terms.
Using daily data f rom 1900 to date, we look
f irst at drawdowns f or US equities, the historical
record of which is shown in Figure 2 in blue. Eq-
uity investors have suf f ered large extremes of
perf ormance. Af ter the Wall Street Crash, US
stocks f ell to a trough in July 1932 that was in
real terms 79% below the September 1929 peak;
they did not recover until February 1945. This
deep drawdown and long recovery period, sets
more recent setbacks in context.
From January 1973, stock prices collapsed un-
til, by October 1974, the equity index was down in
nominal terms by 48%, and in real terms by 56%.
It took only 26 months to recover the nominal
high; however, in real terms equities were under-
water until April 1983. Af ter the t ech- bubble
burst in March 2000, equit y prices also col-
Fi gure 2
Drawdown on US equit ies and bonds, real t erms 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates
- 80%
- 70%
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0%
1900 10 20 30 40 50 60 70 80 90 2000 10
Bonds Equities
Fi gure 1
Equit y risk premium versus t o bonds, 1900–2010 and 2000–10
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates.
Germany excludes 1922–23.

3. 8
-3. 2
-8
-6
-4
-2
0
2
4
6
SAf Nor Aus Den Spa NZ Can Swe UK Avg Swi Bel Ir e Ger US Fra Ita Jap Net Fin
Annualized excess return of equities vs bonds (%)
1900–2010 2000–10
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _7
lapsed and, by October 2002, the real equity
index was down in nominal terms by 48%, and in
real terms by 52%. While the nominal recovery
took only 47 months, in real terms the market
remains underwater to this day. Similarly, during
the 2007–09 f inancial crisis, real equity values f ell
by 56%, and they have not yet f ully recovered.
Af ter the meltdowns of 1973–74, 2000–02
and 2007–09, investors were lef t with between
44% and 48% of their peak- level real wealth. But
this was still more than twice as much as those
who endured the 1929 Crash. Recent setbacks in
the USA, while severe, were not on the scale of
the 1930s, and equity portf olios were less under-
water. However, it can take a long time f or recov-
ery in real terms – even ignoring costs and taxes.
British stock market experience, shown in Fig-
ure 3 in blue, was similar. Whereas we have daily
data starting in 1900 f or the USA, our daily data
f or the UK starts in 1930. Compared to the USA,
the UK suf f ered greater extremes of poor stock
market perf ormance. Af ter October 1936, the
approach and arrival of war led to a real stock
market decline of 59% by June 1940, though
recovery was complete by October 1945.
Bef ore the oil crisis, the equity market had hit a
high in August 1972, but UK equities entered
1975 down f rom that peak by 74% in real terms,
and recovery took till February 1983. The tech-
crash in March 2003 generated a real loss of
49%, which was recovered by October 2006.
Af ter June 2007, the f inancial crisis hit the UK
hard, and by March 2009 equities were down by
47% in real terms; they are still underwater.
Bond drawdowns
The scope f or deep and protracted losses f rom
stocks makes f ixed- income investing look, to
some, like a superior alternative. But how well do
bonds protect an investor’ s wealth? In Figures 2
and 3, we plot in red the corresponding draw-
downs f or government bonds. For those who are
seeking saf ety of real returns, these charts are
devastating. Historically, bond market drawdowns
have been larger and/ or longer than f or equities.
In the US bond market, there were two major
bear periods. Following a peak in August 1915,
there was an initially slow, and then accelerating,
decline in real bond values until June 1920 by
which date the real bond value had declined by
51%; bonds remained underwater in real terms
until August 1927. That episode was dwarf ed by
the next bear market, which started f rom a peak
on December 1940, f ollowed by a decline in real
value of 67%; the recovery took f rom September
1981 to September 1991. The US bond market’ s
drawdown, in real terms, lasted f or over 50 years.
The UK had a similar experience. The f irst bond
bear market started in January 1935, and by
September 1939 the real value of bonds had
f allen by 33%; the recovery took until April 1946.
But in October 1946, bonds began to slide again
in real terms, having lost 73% of their value by
December 1974. UK government bonds were
underwater, in real terms, f or 47 years until De-
cember 1993. While bonds appeared less risky in
nominal terms, it is clear that their real value can
be destroyed by inf lation.
Bal anced port f ol i os
Figure 4 presents the drawdown on an illustrative
balanced portf olio of 50% equities and 50%
bonds. The drawdown is plotted f or both the USA
(in blue, upper panel) and UK (in red, lower
Fi gure 3
Drawdown on UK equit ies and bonds, real t erms 1930–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates
- 80%
- 70%
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0%
1930 40 50 60 70 80 90 2000 10
Bonds Equities
Fi gure 4
Drawdown on 50:50 st ock-bond blend, real t erms 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates
- 50%
- 40%
- 30%
- 20%
- 10%
0%
- 6 0 %
- 5 0 %
- 4 0 %
- 3 0 %
- 2 0 %
- 1 0 %
0 %
1 9 00 1 0 2 0 3 0 4 0 50 6 0 7 0 8 0 9 0 2 00 0 1 0
US bl en d UK b le nd
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _8
panel). Individually, equities and bonds have on
several occasions lost more than 70% in real
terms. But since 1900, this 50:50 blend has
never (USA) or virtually never (UK) suf f ered a
decline of over 50%. Furthermore, the duration of
drawdowns is brief er f or the blend portf olio than
f or the supposedly low- risk f ixed income asset.
Measured in local currency adjusted f or inf la-
tion, the long- term annualized real return on US
equities was 6.3% (6.1% in the UK, f rom 1930).
Meanwhile, US government bonds had a real
return of 1.8% (2.1% in the UK, f rom 1930). The
50:50 blend portf olio returned an annualized
4.5% in the US (4.4% in the UK, f rom 1930).
While a 50:50 equity/ bond blend has had a
lower expected return than an all- equity portf olio,
it has also had a lower volatility. Since 1900, the
standard deviation of real equity returns has been
20.3% in the USA and 20.0% in the UK, as com-
pared to bonds which has a standard deviation of
10.2% in the USA and 13.7% in the UK. For the
blend portf olio, the standard deviation was attrac-
tively low: 11.7% in the US and 14.4% in the UK.
There is nothing special about a 50:50 asset
mix and, in reality, investors should diversif y
across more assets than just local stocks and
bonds. However, this example serves to highlight
the risk- reducing potential of a balanced portf olio
of bonds and stocks.
Bonds as a di versi f i er
Why is the downside risk of the blended stock/
bond portf olio lower? There are two reasons. First,
bonds are less volatile than equities. The country
prof iles (page 31 onwards) show that in all 22
Yearbook markets, bonds have had a lower stan-
dard deviation (averaging 12.5% across our 19
countries) than equities (which average 23.4%).
Second, bonds are imperf ectly correlated with
stocks. Figure 5 plots the correlation between
stock and bond returns computed in real terms
over a rolling window of 60 months. The correla-
tions are shown f or both the USA and UK. The
stock- bond correlations as at end- 2010 are nega-
tive: f or the USA a correlation of –0.14, and f or
the UK –0.03.
In contrast to recent experience, the stock-
bond correlation has been positive, although f airly
low, over the very long term. In the USA, using
real returns over the period 1900–2010, it aver-
aged +0.19 with a range of –0.38 (in January
1960) to +0.67 (in October 1924). In the UK,
using real returns over the period 1930–2010, it
averaged +0.31 with a range of –0.31 (in May
2007) to +0.74 (in December 1939).
When inf lation accelerated and subsided, f rom
the 1970s to the 1990s, changes in inf lation
expectations drove both stock and bond markets
in tandem. Stock- bond correlations were brief ly
negative around the 1929 Crash and f or a longer
period in the late 1950s and early 1960s. But, in
the turmoil of the 2000s, when bonds became a
desirable saf e- haven asset, the correlation be-
came strongly negative in both countries.
In Figure 6, we display rolling 60- month stock-
bond correlations averaged across the Yearbook’ s
19 countries. The indices are the MSCI equity and
Citigroup WGBI bond indices (except South Af rica
f or which we use swap rates), starting in 1989 f or
most countries. They are denominated in local
currency and adjusted by local inf lation. Figure 6
provides clear conf irmation that the US and UK
pattern of relatively low stock- bond correlations
af ter the 1990s was prevalent worldwide. The key
Fi gure 5
Rol l i ng st ock-bond correl at i ons: real t erms, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Credit Suisse Global Investment Returns Source-
book 2011, and authors’ extensions.
- 0.4
- 0.2
0.0
0.2
0.4
0.6
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
United States United Kingdom
Fi gure 6
Gl obal average of rol l i ng st ock-bond correl at i ons
Source: Elroy Dimson, Paul Marsh, and Mike Staunton; MSCI and Citigroup; Antti Ilmanen
- 0.4
- 0.2
0.0
0.2
0.4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _9
question is this: Will low correlations persist into
the f uture?
While we cannot predict the f uture, we can
read the tea leaves of history. We theref ore exam-
ine how stock- bond correlations behaved over the
very long term in all 19 Yearbook countries. Our
aim is to see whether the relatively low correla-
tions we have f ound f or the US and UK – and f or
other countries more recently – have been re-
peated elsewhere.
We theref ore compute stock- bond correlations
f or all 19 Yearbook countries, based on annual
real returns f or the entire 111 years f rom 1900,
and also f or the years f rom 1950 to 2010. These
correlations are shown in Figure 7. They are gen-
erally positive, with an average of +0.24 over the
entire period starting in 1900, and +0.19 over the
period starting in 1950. In Figure 7, we also dis-
play stock- bond correlations based on returns over
60 months to the end of 2010. For every country,
the correlation estimated over the recent period
2006–10 is lower than the average of the correla-
tions estimated over the longer intervals of 1900–
2010 and 1950–2010.
Consistent with the last observation at the right
of Figure 6, the average of all 19 countries’
monthly stock- bond correlations in Figure 7 is
–0.19. But even if correlations rise towards the
long- term averages depicted in Figure 7, they will
still be low. With a low correlation to equities,
bonds of f er diversif ication opportunities.
The mat uri t y premi um
Over the horizon spanned by the Yearbook, long-
maturity government bonds provided a superior
return compared to holding Treasury bills. In the
USA, an investment of USD 1 in 1900 in a long
bond index, representing the returns on govern-
ment bonds with an approximate maturity of 20
years, grew by the end of 2010 to a real value of
USD 7.5, an annualized real return of 1.8%. A
comparable investment in US government Treas-
ury bills – which typically have a very short- term
maturity of around one month – grew to a real
value of USD 2.9, an annualized real return of
1.0%.
These long- term real returns on US bonds and
bills are portrayed in Figure 8. We also show the
real return f rom investing in mid- maturity US gov-
ernment bonds, with an average maturity of f ive
years. Since this mid- maturity bond index starts in
1926, we have set its initial value equal to the
then value of the long- maturity bond index. Over
the 85- year period f rom 1926 to 2010, investors
would have ended up with almost as much f rom
holding mid- maturity as f rom long- maturity bonds.
Finally, we show the perf ormance of corporate
bonds, which grew in real value f rom USD 1 to
USD 15.9, an annualized real return of 2.5%.
The pattern of UK long bond returns is similar.
We measure their perf ormance by UK government
2½% consols until 1954, and thereaf ter by a
portf olio of dated bonds with an average maturity
of 20 years. Starting in 1900, investment in this
long bond index of GBP 1 grew by the end of
2010 to a real value of GBP 4.6, an annualized
real return of 1.4%. A comparable investment in
Treasury bills grew to a real value of GBP 3.1,
equivalent to an annualized real return of 1.0%.
More details on long- term returns f or the UK are
provided in the Credit Suisse Global Investment
Returns Sourcebook.
In both the USA and the UK, the history of
bond investment was not a tale of steady pro-
Fi gure 8
Cumul at i ve real ret urn f rom US bonds, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton Triumph of the Optimists; authors’ updates, Morn-
ingstar / Ibbotson Associates, Global Financial Data
7.5
2.9
6.8
15.9
0
4
8
12
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Long- maturity bonds 1.8% per year Tr easur y bills 1.0% per year
Mid-maturity bonds 1.7% per year Corporate bonds 2.5% per year
Fi gure 7
St ock-bond correl at i ons: Vari ous t i me hori zons, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, MSC data; Antti Ilmanen
.24
. 19
- .19
- 0.6
- 0.4
- 0.2
0.0
0.2
0.4
Nor Aus Ger Jap Fra Net Den Fin Can Swe US Avg Swi NZ Bel UK Ir e SAf Ita Spa
1900–2010 1950–2010 Monthly 2006–10

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _10
gress. As described earlier, there were two bear
markets, the second of which was especially
lengthy, and in real terms, US and UK govern-
ment bonds were below their high- water mark
f rom about half a century. There were also two
strong bull phases. The f irst bull market was one
in which real bond returns were underpinned by
the def lation of the 1930s, while the second was
underpinned by gradual success in conquering the
inf lationary pressures of the 1970s. We have
discussed long- maturity government bonds in the
US and UK, but what about worldwide evidence?
Gl obal bond perf ormance
In the second half of this Yearbook, the Country
Prof iles show that the annualized real bond return
in the 19 countries averaged 1.0%. For our world
bond index, the annualized real (USD) return was
1.6%.
While the USA and UK are broadly in line with
global f inancial history, there is considerable varia-
tion across countries. Six countries – Belgium,
Finland, France, Germany, Italy and Japan – had
real bond returns over the last 111 years that
were negative. For these countries, we can be
completely sure that realized returns f ell short of
investors’ expectations. Although bonds have
been less volatile than equities, they have been
hampered by lower average long- run rates of
return. There have consequently been lengthy
periods when bond perf ormance lagged behind
inf lation. As we showed in the drawdown charts,
bonds have theref ore sometimes experienced
prolonged periods of remaining underwater, of f set
by interludes with excellent perf ormance.
As Figure 9 indicates, the two world wars were
generally periods of poor perf ormance f or bond
investors. During World War I, the world bond
index lost 39% of its real value, while World War II
and its af termath were accompanied by a 49%
decline in real terms. Though wars are bad, def la-
tion has been good news f or bond investors: dur-
ing the def lationary period 1926–33, the 144%
real return on the world bond index was equivalent
to 11.8% per year. Figure 9 depicts some of
these episodes of extreme bond market perf orm-
ance. The worst periods f or bond investors were
episodes of exceptionally high inf lation, as experi-
enced in Germany (1922–23), Italy and France
(1940s), and the UK (1972–74).
During 1982–86, the world bond index rose by
a real 94% (14.2% per year) and, over 1982–
2008, it gave a real return of 649% (7.7% per
year). These high returns have arisen f rom a re-
markable decline in interest rates since the inf la-
tionary 1970s.
Int erest rat es and i nf l at i on
The extent to which interest rates have f allen is
highlighted in Figure 10. This graph plots the level
of the short- term interest rate in the UK, linking
together data f or the bank rate, minimum lending
rate, minimum band 1 dealing rate, repo rate and
of f icial bank rate. As we show in the chart, nomi-
nal interest rates have never been as low in the
UK as today – not only during the 21st and 20th
centuries, but even in the 19th, 18th and 17th
centuries. These low interest rates ought to be
good news f or borrowers (though, in reality, bor-
rowers f requently f ace loan limits and pay signif i-
cant credit spreads). For bond investors, the de-
cline in interest rates has been good in retrospect,
since bond prices rose. But that means they are
Fi gure 10
Short -t erm nomi nal i nt erest rat es i n t he UK, 1694–2010
Source: Bank, minimum lending, minimum band 1, repo and off icial bank rates from Bank of England
1694 1750 1800 1850 1900 1950 2010
0
2
4
6
8
10
12
14
%

Fi gure 9
Ext reme real ret urns i n bond market hi st ory, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook
2011
144
- 95
- 84
- 50
- 100
649
- 39
- 49
94
- 100
0
100
200
'14–18
World
'39–48
World
'26–33
World
'22–23
Ger
'43–47
Ita
'45–48
Fra
'72–74
UK
'82–86
World
'82–2008
World
World wars Def lat ion Inf lat ion and hyperinf lat ion Beat ing inf lat ion Golden era
11.8%
p.a.
14.2%
p.a.
7.7%
p.a.
(Ger:
–75%)
(Jap:
–99%)
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _11
poorer in prospect, since the f orward- looking
return f rom f ixed income securities is now low.
Today’ s yields on sovereign bonds are small,
regardless of maturity or geography, except f or
countries where credit risk is a concern. Yet, as
we have seen, f ixed income investors can be
exposed to major drawdowns if inf lation and inter-
est rates accelerate ahead of expectations.
Meanwhile, there is reduced scope f or return
enhancement through f urther cuts in interest rates
or unconventional measures such as quantitative
easing. The only exceptions are issuers that are
regarded as a credit risky. Here, there are oppor-
tunities to increase expected returns, although
only by exposing portf olios to corporate or sover-
eign def ault risk.
Inf l at i on reduces bonds’ saf e-haven st at us
When higher inf lation is a threat, bond yields will
obviously rise and prices will f all. But price f alls
are likely to be greater than can be explained just
f rom the impact of higher expected inf lation on the
real cash f lows f rom bonds. The real yield is also
likely to rise because of three intertwined f actors.
First, when the purchasing power derived f rom
a f ixed- interest investment is uncertain, it loses
some of its attraction as a ref uge f rom f inancial
market volatility. Second, when inf lation is higher
it is typically more volatile, and the required pre-
mium f or exposure to inf lation uncertainty will rise.
And third, when inf lation is high it hurts company
values as well as bond prices, increasing the
stock- bond correlation and reducing the diversif i-
cation benef its f rom bonds. These pressures limit
the saf e- haven attribute of bonds and, at the
same time, increase their beta relative to equities.
Thus during periods of continuing and variable
inf lation, expected bond returns are higher, not
only in nominal terms, but also in real terms. The
yield curve can be expected to slope upwards so
as to provide long- bond investors, who predomi-
nately care about real returns, with a positive term
premium. This premium increases with duration,
as longer bonds f ace greater inf lation uncertainty.
Conversely, during a period when consumer
prices f all, bonds have f avorable investment char-
acteristics. They are the only asset class that
provides a hedge against def lation and they are a
saf e haven during stock market crises. So when
def lation is a concern, government bonds come
into their own. Also, at such times, bonds are
more likely to be a hedge against the equity mar-
ket (see Figures 5 and 6).
Consistent with this story, we have shown that
over recent periods, stock- bond correlations have
been lower than correlations based on long- term,
data (see Figure 7). The expected return f or a
low- or negative- beta asset should ref lect its risk-
reducing attributes. Consequently, as the beta of
government bonds f ell during the 1990s and into
the 2000s, they were re- priced to of f er a smaller
f orward- looking risk premium. Yields declined, and
realized returns were theref ore high.
Looking to the f uture, if bonds retain their saf e-
haven attributes, they can be expected to deliver
low but positive perf ormance in the years ahead.
If , however, higher and uncertain inf lation reap-
pears, then bonds will be perceived as riskier,
yields and expected returns will increase, and
prices will f all. In recent months, as inf lationary
concerns have moved into the ascendancy, we
have already seen a move in this direction.
Inf l at i on ri sk
When inf lation accelerates, bond prices will there-
f ore f all because f uture cash f lows decline in real
terms, while the real yield increases. The rise in
real yields is needed to increase the f orward-
looking real return to a level that attracts investors
to hold these securities. We conf irm this in Figure
11. At each New Year, countries are ranked by
the annual inf lation they will experience over the
year ahead. Note that, while this enables us to
quantif y the impact of inf lation on real bond val-
ues, it is not an implementable strategy, since
year- ahead inf lation is not known in advance.
We assign the 19 Yearbook countries to quin-
tiles that comprise f our countries (three f or the
middle quintile). Each portf olio is allocated equally
to the constituent countries’ bonds. Income is
reinvested, and at the end of each year, countries
are re- ranked and portf olios rebalanced. Figure
11 reports returns in real USD. The lef tmost bars
in Figure 11 show the annualized real returns f rom
quintiles 1, 3 and 5 over the f ull 111 year period.
The countries with the lowest inf lation perf ormed
best, while bonds in high- inf lation countries un-
derperf ormed. This pattern was evident over all
Fi gure 11
Real ret urns: ranking by concurrent inflation, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates
6.4
10.8
4.9
8.5
7.8
3.2
2.0
2.6
5.5
10.9
3.4
7.9
1.7
0.1
-2.6
0 . 2
-2.3
- 0 .4
- 4
- 2
0
2
4
6
8
1 0
19 00 –2 01 0 19 00 –1 9 24 1 92 5– 19 49 1 95 0– 19 7 4 1 975 –1 99 9 20 00 –2 01 0
Lowest inf lat ion count ries Middle inf lat ion count ries Highest inf lat ion count ries
% p.a.
6.4
10.8
4.9
8.5
7.8
3.2
2.0
2.6
5.5
10.9
3.4
7.9
1.7
0.1
-2.6
0 . 2
-2.3
- 0 .4
- 4
- 2
0
2
4
6
8
1 0
19 00 –2 01 0 19 00 –1 9 24 1 92 5– 19 49 1 95 0– 19 7 4 1 975 –1 99 9 20 00 –2 01 0
Lowest inf lat ion count ries Middle inf lat ion count ries Highest inf lat ion count ries
% p.a.
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _12
subperiods of the 20th and 21st centuries, other
than the 11- year period since the year 2000.
With a perf ect year- ahead f orecast of the 19
inf lation rates, this could be a prof itable trading
rule – buy the bonds of those countries that are
destined to report the lowest inf lation rates. How-
ever, no investor has access to a crystal ball. The
investor could buy the bonds of countries that
have reported low inf lation f or the preceding year,
but as we show next, that is a quite dif f erent
strategy and it is not a recipe f or investment suc-
cess.
The i nf l at i on premi um
In terms of purchasing power, bonds are riskier
when inf lation is higher and uncertain. During
periods of higher inf lation, government bonds can
theref ore be expected to have a higher expected
real return. Do they on average deliver a higher
real return when inf lation rates are higher? We
look again at the long- term history of the 19
Yearbook countries to address this question.
As bef ore, at each New Year, countries are
ranked by their annual inf lation rate – but now we
use inf lation f or the year preceding investment.
We assign the 19 Yearbook countries to quintiles
that comprise f our countries. Each portf olio is
allocated equally to the constituent countries’
bonds. Income is reinvested, and at the end of
each year, countries are re- ranked and portf olios
rebalanced. Returns are in real USD.
The lef tmost bars in Figure 12 show the annu-
alized real returns f rom each quintile over the f ull
111 year period. Bonds in the countries with the
highest inf lation rates tended to have higher real
returns over the subsequent year, conf irming that
bonds were priced so as to provide a higher f or-
ward- looking return. This pattern was evident over
all subperiods of the 20
th
and 21st centuries,
other than the f irst quarter- century of the 1900s.
We also f ind that the volatility of real returns in
high- inf lation countries is larger than that of low-
inf lation countries: over the entire period 1900–
2010, the standard deviation of real bond returns
in the high- inf lation countries was 17.6%, as
compared to 14.6% in the low- inf lation countries.
The higher long- run real return f rom high- inf lation
countries provided some compensation f or uncer-
tainty about the purchasing power of bonds in the
bond issuer’ s economy, and the risk of underper-
f orming in terms of USD returns.
Avoi di ng acci dent s
Since the beginning of the 21st century, govern-
ment bonds have achieved excellent perf ormance,
beating equities in most of the 19 countries in the
Yearbook. Over the long term, equities have
beaten f ixed income investments, and the 21st
century has so f ar deviated f rom historical prece-
dent. Bond yields have f allen, and investors are
now concerned about capital losses on their port-
f olios.
We have documented the scale of drawdowns
f rom bond portf olios in the UK and USA, and
compared them to drawdowns f rom equity portf o-
lios. Government bonds have suf f ered two big
bear markets, f ollowed by recoveries. On both
sides of the Atlantic, bonds were underwater in
real terms f or about half a century.
We show that simple domestic diversif ication
between stocks and bonds can reduce downside
risk, although the expected investment perf orm-
ance of a blended bond- plus- equity portf olio is
naturally lower than an all- equity portf olio. The
scope f or diversif ication between bonds and
stocks depends crucially on the correlation be-
tween the returns on these two asset classes. We
report on how the stock- bond correlation has
varied over time. We show that it is typically quite
low, and that f rom the 1990s to the 2000s it
moved, globally, f rom positive to negative.
The bad times f or bond investors have included
times that are inf lationary, and when interest rates
are low and then subsequently rise more than
expected. We present evidence on the extremes
of global bond market perf ormance since 1900,
and on the magnitude of current interest rates
compared to the ultra- long- term historical record.
This motivates us to undertake a cross- country
study of the impact of inf lation on the real (inf la-
tion- adjusted) investment perf ormance of gov-
ernment bonds.
We demonstrate the decimating impact of in-
f lation on contemporaneous bond returns. But we
also show that attempts to avoid these risks, by
Fi gure 12
Real ret urns: ranki ng by pri or-year i nf l at i on, 1900–2010
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists; authors’ updates
2.3
1.6
1.7
5.6
4.6
3.4
2.3
1.9
7.2
7.9
4.0
3.8 3.8
7.2
9.4
- 0.4
0.6
- 1.4
- 2
0
2
4
6
8
1900–2010 1900–1924 1925–1949 1950–1974 1975–1999 2000–2010
Lowest inf lat ion count ries Middle inf lat ion count ries Highest inf lat ion count ries
% p.a.
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _13
investing in the bonds of low- inf lation countries,
may provide lower returns.
An alternative strategy is to buy bonds issued
by governments that have experienced high rates
of inf lation, rebalancing the portf olio annually to
maintain exposure to high- inf lation markets. This
approach is more risky, and has a higher volatility
of returns. While has generated a higher return
over the long term, this may be no more than a
risk premium f or exposure to the bonds issued by
inf lation- prone countries.
Of course, inf lation expectations are not the
sole driver of conventional bond prices, and the
broader supply- demand dynamic is also important.
The supply side includes f actors such as the im-
pact of the def icit, changes in the scale of bond
issuance, and the choice of instrument to issue.
On the demand side, there are regulatory changes
that af f ect investor behavior, like minimum f unding
requirements f or pension f unds and capital re-
quirements f or lif e companies. Nevertheless, over
the long term, the investment perf ormance of
bonds has depended crucially on real interest
rates and the impact of inf lation.
As inf lation receded, interest rates f ell and the
demand f or a saf e haven increased, leading to
outstanding investment perf ormance f rom gov-
ernment bonds. But the golden age of the last 28
years cannot continue indef initely, and we must
expect returns to revert towards the mean. Only a
raging optimist would believe that, given today’ s
bond yields, the f uture can resemble the more
recent past. It is sheer f antasy to expect bond
perf ormance to match the period since 1982.
Yet expecting bond returns to be lower than in
the golden era is not the same as asserting they
will enter a protracted period of negative perf orm-
ance. A popular view is that bonds are in a bubble,
or that yields, even on long bonds, will go up,
giving rise to capital losses. While this is entirely
possible, the f act that real returns have been
unusually high over several decades does not
mean that in f uture they will be unusually low.
Current bond yields – which despite recent rises
remain historically quite low – may simply ref lect
what we can expect.
While the long- run return f rom investing in gov-
ernment bonds has been lower than equities, this
is what we should expect, given their lower risk.
And government bonds have unique properties
and an important role in asset allocation. They
continue to provide a saf e haven to investors, a
hedge against def lation, and opportunities f or
portf olio diversif ication.

P
H
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K
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/
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A
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P
E
Y
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _15

In autumn 2010, US 10- year Treasury yields f ell
to 2.4%, just above their post- Lehman crisis level,
which marked their low point in over half a century
(see Figure 1). Shorter rates were lower still. 5-
year Treasury yields dipped below 1%, while cash
yielded close to zero. These historically low rates
were mirrored in most developed countries, except
those where credit risk was a concern.
Although bond yields rose sharply by the year-
end, they were still low by historical standards.
Year- end equity yields were also well below their
historical means, but equities nevertheless still
appeared competitive, relative to bonds, in terms
of income. Over the last 50 years, US bond yields
exceeded equity yields by an average of 3.9% Ũ
the so- called “reverse yield gap” (see Figure 1). In
the depths of the credit crunch, the US yield gap
brief ly turned positive. While now negative again,
it remains low by the standards of the last 50
years Ũ as it does in other major world markets.
Many investors view the yield gap as a crude
indicator of the relative attractiveness of equities.
They argue that if equity yields are close to, or
only a little below those on government bonds,
then equities are the more attractive since, unlike
f ixed income bonds, they of f er the prospect of
income growth. Furthermore, by tilting their port-
f olios towards higher- yielding shares and markets,
investors can obtain a prospective yield higher
than that f rom bonds. Moreover, in uncertain
times, tilting towards higher yielders is widely
viewed as “saf er.” But can it be that simple?
Mi nd t he (yi eld) gap
Setting aside countries whose governments f ace
appreciable credit risk, equity investors should
expect a return premium compared to government
bonds because stocks have higher risk. Equities
provide a current dividend yield plus an expected
growth rate of dividends, while the expected bond
return is the current redemption yield. The yield
gap is theref ore equal to the equity premium ver-
sus bonds minus the expected growth rate in
dividends. Expressing this in real terms, the yield
gap equals the expected equity premium versus
bonds, minus the expected real growth rate in
dividends, minus the expected inf lation rate.
This decomposition of the yield gap into its un-
derlying components helps explain the pattern we
see in Figure 1. We would expect the yield gap to
be lower when the expected inf lation rate is
The quest for yield
Low interest rates on cash and government bonds are causing investors to
seek income elsewhere, especially f rom equities and corporate bonds. While
investors remain nervous about equities, there is a belief that higher- yielding
stocks not only provide enhanced income, but are less risky. This article
examines whether income, per se, should matter. It shows the contribution of
income and dividend growth to long- term returns. It investigates the perf orm-
ance and risks of strategies tilted towards higher yield, both within and across
equity markets. Finally, it looks at the risk and return f rom corporate bonds.
El roy Di mson, Paul Marsh and Mi ke St aunt on, London Business School
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _16

higher; to be lower when the expected risk pre-
mium is lower; and to be lower when the expected
growth rate of dividends is higher. Figure 1 shows
that the US yield gap was mostly positive (i.e.
equities yielded more than long bonds) until the
mid- 1950s, while since then it has been mostly
negative. The most obvious driver has been inf la-
tion and inf lationary expectations. From 1900 to
1959, US inf lation averaged 2.1% per year; since
then, it has averaged 4.1%. Year- on- year inf lation
peaked at 15% in 1980, while the reverse yield
gap peaked at over 10% in 1981.
Our decomposition of the yield gap also helps
explain why it turned positive in December 2008,
rising to 1% in the USA at the height of the f inan-
cial crisis. First, inf lationary expectations had f allen
sharply, and there were signif icant def lationary
concerns. Second, expected dividend growth had
been revised downwards. Third, the equity risk
premium had increased. The premium is the re-
ward per unit of risk that investors require to in-
vest in risky equities rather than less risky gov-
ernment bonds. In December 2008, equities had
f allen sharply, making investors poorer and more
risk averse, while risk had greatly increased.
Fortunately, the extreme conditions of the
credit crunch were f airly short- lived, and the yield
gap in most countries has again f allen. Neverthe-
less, Figure 2 shows that by end- 2010, yield gaps
in the world’ s major markets remained high by the
standards of the last 50 years. The yield gap was
Ũ1.6% in the USA, Ũ0.7% in France, Ũ0.5% in
the UK, Ũ0.2% in Germany, and actually positive
in Japan and Switzerland. These yield gaps simply
ref lect the current consensus about market condi-
tions, rather than signaling a buying opportunity
f or stocks. Yet despite this, continuing low inter-
est rates have led many investors to look increas-
ingly to equities and dividends f or income.
Why di vi dends mat t er
From day to day, investors f ocus mostly on price
movements, which is where the action is. In con-
trast, dividends seem slow moving. Indeed, over a
single year, Figure 3 shows that equities are so
volatile that most of an investor’ s perf ormance is
attributable to share price movements (the blue
bars). Dividend income (the red area plot) adds a
relatively small amount to each year’ s gain or loss.
On balance over the years, capital gains out-
weigh losses. The blue line plot in Figure 3 shows
that a US equity portf olio, which started in 1900
with an investment of one dollar, would have
ended 2010 valued at USD 217, even without
reinvesting dividends. In nominal terms, this is an
annualized capital gain of 5.0%.
While year- to- year perf ormance is driven by
capital gains, long- term returns are heavily inf lu-
enced by reinvested dividends. The red line plot in
Figure 3 shows that the total return f rom US
equities, including reinvested dividends, grows
cumulatively ever larger than the capital apprecia-
tion, reaching USD 21,766 by the end of 2010,
an annualized return of 9.4%. The terminal wealth
f rom reinvesting income is thus almost 100 times
larger than that achieved f rom capital gains alone.
This ef f ect is not specif ic to the USA, but is
true f or all equity markets. Indeed, the longer the
investment horizon, the more important is dividend
income. For the seriously long- term investor, the
value of a portf olio corresponds closely to the
present value of dividends. The present value of
the (eventual) capital appreciation dwindles greatly
in signif icance.
Fi gure 1
US bond and equi t y yi el ds, 1900–2010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Global Financial Data.
3.4
- 1.6
1.7
- 10
- 5
0
5
10
15
1900 10 20 30 40 50 60 70 80 90 2000 10
Yield (%) on 10- year bonds Yield gap (%) Dividend yield (%)

Fi gure 2
Yi el ds and reverse yi el d gap, 1950–2010
Sources: Elroy Dimson, Paul Marsh and Mike Staunton; Thomson Datastream; Global Financial Data
- 10
- 5
0
5
10
15
B
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US UK Germany France Japan Switzerland
Minimum (month- end) yield End- 2010 yield Average yield Maximum yield

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _17

Di vi dend growt h
Unlike f ixed- income investments, equities of f er
the prospect of dividend growth. Historically, divi-
dends have grown in nominal terms in every Year-
book country. But what matters is real, inf lation-
adjusted growth. Figure 4 shows the Yearbook
countries and world index ranked by their annual-
ized real dividend growth over 1900–2010 (the
gray bars). Real dividend growth has been lower
than is of ten assumed. Figure 4 shows that 10
out of 19 Yearbook countries recorded negative
real dividend growth since 1900, and only f our
enjoyed real dividend growth above 1% per year.
Real dividends on the world index grew by 0.83%
per year, bolstered by the heavy weighting of the
USA. Dividends, and probably earnings, have
barely outpaced inf lation.
Dividend growth was lower in the turbulent f irst
half of the last century, with real dividends on the
world index f alling by 0.9% per year. Real divi-
dends grew in just three countries: the USA,
Australia, and New Zealand. But f rom 1950 to
2010, real dividends grew everywhere except
New Zealand, and the world index enjoyed f ar
healthier real growth of 2.3% per year. Figure 4
also shows how dividend yields have changed over
the long run. The red bars show the annualized
change in the price/ dividend ratio (the reciprocal
of the yield) f rom 1900 to 2010. Over the last
111 years, price/ dividend ratios have risen (divi-
dend yields have f allen) in 16 of the 19 countries.
The price/ dividend ratio of the world index grew
by 0.48% per year.
Finally, the blue bars in Figure 4 show the
mean dividend yield in each country f rom 1900 to
2010. By def inition, the real annualized equity
return in each country is equal to the sum of the
three bars shown f or that country, i.e. the mean
dividend yield plus the real growth rate in divi-
dends plus the annualized change in the price/
dividend ratio. Dividends have invariably been the
largest component of real returns.
The sense i n whi ch di vi dends are i rrel evant
Dividends are thus a key component of long- run
returns, but what does this mean f or investors? It
would be trite to advise that dividends should be
reinvested Ũ and this would be inappropriate f or
investors who need income. It would also be
wrong to conclude f rom the analysis above that
investors should pref er dividends to capital gains
or seek out high- yielding stocks. But there are
two conclusions we can draw. First, investors
should f ocus on the long term and not be too
inf luenced, or daunted, by short- term price f luc-
tuations. Second, dividends are central to stock
valuation.
From the earliest days of f ormal security analy-
sis, dividends have played a central role in valua-
tion. John Burr Williams, the f ather of investment
analysis, wrote the f ollowing stanza in his 1938
classic, The Theory of Investment Value (but bear
in mind that f inancial poetry seldom rhymes):
A cow f or her milk,
A hen f or her eggs,
And a stock by heck
For her dividends.
Williams’ point remains true today. When ana-
lyzing investments, the key issue is to assess the
company’ s potential to distribute cash to share-
holders Ũ not necessarily today, but over the long
run. The value of a share is simply the discounted
value of its f uture, long- term dividend stream.
Fi gure 3
Impact of dividends, Unit ed St at es, 1900–2010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Triumph of the Optimists; authors’ updates
21,766
217
- 50
- 25
0
25
50
75
1900 10 20 30 40 50 60 70 80 90 2000 10
1
10
100
1000
10000
100000
Annual dividend impact Annual capital gain
US: total return 9.4% per year US: capital gain 5.0% per year
Annual return (%) Cumulative value: 1900 = USD1

Fi gure 4
Component s of equit y ret urns globally, 1900–2010
Source: Elroy Dimson, Paul Marsh and Mike Staunton
4.1
0.8
0.5
- 3
- 2
- 1
0
1
2
3
4
5
Jap Ita Bel Ger Den Ire Fra Spa Net Nor Swi UK Fin Wld Can SAf Aus NZ US Swe
Mean dividend yield Real dividend growth Change in price/ dividend ratio

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _18

Fif ty years ago, Franco Modigliani and Merton
Miller pointed out that, setting aside taxes and
dealing costs, investors should be indif f erent be-
tween dividends and capital gains. They argued
that if investors received too little income f rom
dividends, they could make up the dif f erence by
selling stock. And if dividends exceeded their
needs, they could reinvest them. This insight
helped Merton Miller to win a Nobel Prize.
Tax, of course, matters since dividends are
usually treated as income and stock sales as
capital gains. This, plus f actors such as withhold-
ing taxes, may lead some investors to pref er either
income or capital gains Ũ indeed, the latter may
be f avored in many tax jurisdictions. Similarly,
dealing costs matter, as investors with lower cur-
rent income needs may f avor low- yielding shares,
to avoid reinvestment costs; while those with high
income needs may pref er high- yielders, to avoid
selling costs. Thus, while there may be no overall
market pref erence f or dividends versus capital
gains, there will be clienteles of investors that
pref er one rather than the other.
Di vi dend t i l t s
Despite the arguments put f orward by Modigliani
and Miller, a number of US researchers have,
since the 1970s, documented a marked historical
return premium f rom US stocks with an above-
average dividend yield. The most up- to- date
analysis is by Kenneth French of Dartmouth Uni-
versity. Figure 5 shows his most recent data,
covering the perf ormance since 1927 of US
stocks that rank each year in the highest- or low-
est- yielding 30% of dividend- paying companies,
the middle 40%, and stocks that pay no divi-
dends. Non- dividend paying stocks gave a total
return of 8.4% per year, while low- yield stocks
returned 9.1% and high- yielders gave 11.2%.
The longest study of the yield ef f ect by f ar is
our 111 year research f or the UK. Prior to the
start of each year, the 100 largest UK stocks are
ranked by their dividend yield, and divided 50:50
into higher- and lower- yield stocks. The capitaliza-
tion weighted returns on these two portf olios are
calculated over the f ollowing year, and this proce-
dure is repeated each year. Figure 6 shows that
an investment of GBP 1 in the low- yield strategy
at the start of 1900 would have grown to GBP
5,122 by the end of 2010, an annualized return of
8.0%. But the same initial investment allocated to
high- yield stocks would have generated GBP
100,160, which is almost 20 times greater, and
equivalent to an annual return of 10.9% per year.
Figure 7 shows that the yield ef f ect has been
evident in almost every country examined. This
chart covers 21 countries Ũ all the Yearbook
countries except South Af rica, plus Austria, Hong
Kong, and Singapore. The underlying portf olio
returns data were again generously provided by
Ken French. For most countries, the period cov-
ered is the 36 years f rom 1975 to 2010, with the
premium based on the highest- and lowest-
yielding 30% of dividend- paying companies. For a
f ew countries, the data starts af ter 1975, while f or
the USA and UK, the yield premia are taken f rom
the much longer studies reported above.
The bars in Figure 7 show the annualized yield
premium, def ined as the geometric dif f erence
between the returns on high- and low- yielders.
The dark blue bars show the premiums over the
longest period available f or each country. In 20 of
the 21 countries, high- yielding stocks outper-
f ormed low- yielders. The exception was New
Fi gure 5
Ret urns on US st ocks by yield, 1927–2010
Source: Professor Kenneth French, Tuck School of Business, Dartmouth (website)
6,903
3,686
1,424
0
1
10
100
1,000
10,000
27 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
High yield 11.2% p.a. Medium yield 10.3% p.a. Low yield 9.1% p.a. Zero yield 8.4% p.a.
0.
853
Fi gure 6
Ret urns on UK st ocks by yield, 1900–2010
Source: Elroy Dimson, Paul Marsh and Mike Staunton; Triumph of the Optimists; authors’ updates
100,160
5,122
- 20
- 10
0
10
20
1900 10 20 30 40 50 60 70 80 90 2000 10
1
10
100
1000
10000
100000
Rolling 5- year annualized yield premium Annual yield premium
High yield 10.9% per year Low yield 8.0% per year
Annual return (%) Cumulative value: 1900 = GBP1
100,160
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _19

Zealand, which is a very small market, where the
analysis was based on a sample of just 20 stocks.
In most other countries, the yield premium was
appreciable, except in Denmark and Ireland, two
other small markets, where it was less than 1%
per year. Across all 21 countries, the average
premium was a striking 4.4% per year. The light
blue bars in Figure 7 show the yield premium over
the 21st century to date, namely, the 11 years
since the start of 2000. Over this period, the
premium was positive in 19 of the 21 countries,
and averaged a staggering 9.1%, more than twice
the level of the longer- term period reported above.
This period embraces the dot- com bust, when
technology, media and telecommunications stocks
Ũ mostly zero- or low- yielders Ũ tumbled f rom
their dizzy heights as investors re- engaged in
stocks with strong f undamentals, including divi-
dends. But this period also spans the credit and
f inancial crisis. This helps explain why Ireland and
Belgium experienced a negative yield premium.
Both markets were heavily weighted towards
banks which, while previously high yielding, sub-
sequently experienced very poor perf ormance.
Expl anat i ons f or t he yi el d premi um
The yield premium is now widely viewed as a
manif estation of the value ef f ect. Value stocks are
those that sell f or relatively low multiples of earn-
ings, book value, dividends or other f undamental
variables. In the context of yield, value stocks or
high- yielders may be mature businesses, or else
dividend payers with a depressed share price that
ref lects recent or anticipated setbacks.
Growth stocks, in contrast, of ten pay low or no
dividends, since the companies wish to reinvest in
f uture growth. They sell on relatively high valuation
ratios, because their stock prices anticipate cash
f lows (and dividends) that are expected to grow.
While many studies document the yield ef f ect,
even more show that value stocks have, over the
long run, outperf ormed growth stocks Ũ f or a
review, see our companion Sourcebook.
Why have high- yielders outperf ormed low- and
zero- yielders? There are f our possibilities. First, it
may simply be by chance and hence unlikely to
recur. But this is hard to sustain, as while there
can be lengthy periods when the ef f ect f ails to
hold, it has nevertheless proved remarkably resil-
ient both over the long run and across countries.
A second possibility is that we are observing a
tax ef f ect, since many countries’ tax systems have
f avored capital gains, perhaps causing growth
stocks to sell at a premium. The impact of tax is
controversial, but tax alone cannot explain the
large premium. Furthermore, in the UK, there was
a yield premium pre- 1914, when income tax was
just 6%. Also, if tax were the major f actor, alter-
native def initions of value and growth stocks
would work f ar less well than dividend yield as an
indicator of high or low subsequent perf ormance.
We have analyzed the most commonly used alter-
native measure, book- to- market, based on the
same 21 markets over the identical time periods,
and f ound that it perf orms almost as well as yield.
A third possibility is that investors become en-
thused about companies with good prospects, and
bid the prices up to unrealistic levels, so growth
stocks sell at a premium to f undamental value.
Evidence f or this was provided in 2009 by Rob
Arnott, Feif ei Li, and Katrina Sherrerd in a study
entitled Clairvoyant Value and the Value Ef f ect
(The Journal of Portf olio Management, 35: 12–
26). They analyzed the constituents of the S&P
500 in the mid 1950s, comparing the stock prices
at the time with what they termed “clairvoyance
value.” This was the price investors should have
paid if they had then had perf ect f oresight about
all f uture dividends and distributions. Arnott classi-
f ied growth stocks as those selling at a premium,
i.e. on a lower dividend yield or at a higher price-
to- earnings, price- to- book or price- to- sales.
Arnott and his colleagues f ound that the market
had correctly identif ied the growth stocks, in that
they did indeed exhibit superior f uture growth.
However, they also concluded that investors had
overpaid f or this growth, by up to twice as much
as was subsequently justif ied by the actual divi-
dends and distributions to shareholders.
The f inal possibility is that the outperf ormance
of value stocks is simply a reward f or their greater
risk. Indeed, hard- line believers in market ef f i-
ciency argue that, whenever we see persistent
anomalies, risk is the prime suspect. Since value
stocks are of ten distressed companies, the risk
argument seems plausible. This could also explain
Arnott’ s f indings if the discount rates used to
compute “clairvoyance value” had f ailed to cater
adequately f or dif f erences in risk. But are high-
yielders really riskier than low- yielders?
Fi gure 7
The yield ef f ect around t he world
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken French,
Tuck School of Business, Dartmouth (website and private correspondence) and Dimensional Fund Advisors
- 5
0
5
10
15
NZ Den Ire US Swi Bel Ita UK Sin Ger Fin Avg Can HK Aus Net Nor Spa Swe Jap Fra Aut
Longer term Since 2000
Yield premium (%)
=
=
=
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _20

Ri sk and ret urn f rom hi gh-yi el d st rat egi es
The key question, theref ore, is whether yield- tilt
strategies lead to higher risk. If they do, the yield
premiums reported in Figure 7 could just be risk
premiums.
Many investors would f ind this counterintuitive,
believing instead that high- yielding stocks not only
provide enhanced income, but are less risky. This
belief may stem f rom the view that a bird in the
hand (a dividend in the bank) is more secure than
two in the bush (f uture returns). If so, this ref lects
a misunderstanding. To see the f allacy, we need
to hold constant the investor’ s desired holding in
stocks. To maintain this exposure, investors will
need to reinvest their dividends, but once rein-
vested, the f unds are again exposed to equity risk.
While cash is certainly saf er than stocks, this
should have been f actored in when deciding on
the desired exposure to equities in the f irst place.
Investors may also perceive high- yielding
stocks to be lower risk because of sector mem-
bership. Utilities tend to have higher yields and are
also generally of lower risk. But investors may well
once have thought the same about bank shares.
Furthermore, many high- yielding stocks are “invol-
untary” high yielders. They have acquired their
high yield because their stock price has f allen.
Such companies may be struggling or distressed,
and their f uture dividend may be f ar f rom assured.
To establish whether high- yield strategies are
higher or lower risk, we theref ore need to analyze
the data. For each of the 21 countries repre-
sented in Figure 7, we estimate the risks and risk-
to- reward ratios f rom investing in higher- yielders
(the highest yielding 30% of dividend payers),
lower- yielders (the lowest yielding 30%), zero
yielders, and the overall market. Our measure of
the market is provided by the MSCI country indi-
ces, since the data that we are using are based
on each country’ s MSCI universe. For the USA,
where we use Ken French’ s much longer series
starting in 1926, we use the DMS US index f or
the market.
For each of the f our investment strategies,
Figure 8 shows the average values f or the 21
countries of the standard deviation of returns (lef t-
hand panel), betas (middle panel) and Sharpe
ratios (right- hand panel). Looking f irst at the lef t-
hand panel, there is clearly no evidence that
higher- yield strategies are more volatile. On the
contrary, the standard deviation of returns on the
lower and zero yielders were both larger than on
the higher- yielding stocks.
The least volatile of the f our strategies is an in-
vestment in the market, i.e. an index f und holding
in each country. This is to be expected, as volatil-
ity is reduced by diversif ication, and the country
index is f ar better diversif ied than the other strate-
gies, which at most embrace 30% of the stocks in
the market. What is more surprising is that the
average standard deviation of returns f rom invest-
Fi gure 8
Risk and ret urn f rom alt ernat ive yield st rat egies
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken
French, Tuck School of Business, Dartmouth, Dimensional Fund Advisors, MSCI and Thomson Reuters
D
22.6
24.0
33.9
21.4
0.42
0.89
0.23
0.98
0.15
1.04
0.30
1.00
Standard deviation (% p.a.) Beta Sharpe ratio
Higher yield Lower yield Zero yield Total country
Averages across 21 countries
Fi gure 9
Sharpe rat ios f rom alt ernat ive yield st rat egies
Sources: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Prof essor Ken
French, Tuck School of Business, Dartmouth, Dimensional Fund Advisors, MSCI and Thomson Reuters
0.0
0.2
0.4
0.6
Ita Spa Jap Avg US Sin Ger Swi UK Net Fra Aus Can Swe HK
Zero yield Lower yield Total country Higher yield
Sharpe ratios

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _21

ing in high- yielders (22.6%) is only marginally
higher than that f rom an index f und (21.4%).
Beta measures systematic risk, or the contribu-
tion to the risk of a diversif ied portf olio. The center
panel of Figure 8 shows that the higher- yield
strategy not only had a lower average beta (0.89)
than both the lower- and zero- yield strategies, but
it also had a lower average beta than an invest-
ment in the market (1.0 by def inition).
Finally, the right- hand panel of Figure 8 shows
the historical average Sharpe ratios. The Sharpe
ratio is def ined as the average historical excess
return (the return over and above the risk f ree or
Treasury bill return) divided by the historical volatil-
ity of excess returns. It thus measures the reward
per unit of volatility. The Sharpe ratio of the
higher- yield strategy (0.42) was almost twice that
of the lower- yield strategy, and almost treble that
of the zero- yield strategy. It was also appreciably
higher than the average Sharpe ratio achieved by
investing in the country index f unds.
Figure 9 shows the Sharpe ratios f or the larger
countries in the sample (the smaller country re-
sults paint a similar picture, but are “noisier” due
to less diversif ied portf olios). It shows that, in
terms of reward f or risk, the higher- yield strategy
beat the lower- and zero- yield strategies in every
country. It also dominated an index f und invest-
ment in every country except Switzerland, where it
was a close runner- up.
It is theref ore hard to explain the superior per-
f ormance of yield- tilt strategies in terms of risk, at
least as conventionally def ined. Indeed, when
growth and value stocks are def ined based on
dividend yield, it is the value stocks that have the
lower volatility and beta.
Count ry yi el d t i l t s
Higher- yielding stocks have outperf ormed lower-
yielders, so perhaps higher- yielding markets have
also outperf ormed lower- yielders. We investigate
this by examining the 19 Yearbook countries over
111 years. At each New Year, countries are
ranked by their dividend yield at the old year- end.
We assign countries to quintiles, each comprising
f our countries, except the middle quintile which
contains three. Each quintile portf olio has an equal
amount invested in each country, and all income is
reinvested. Portf olios are held f or one year. We
then re- rank the countries and rebalance the
portf olios, repeating the process annually.
The lef tmost set of bars in Figure 10 shows the
annualized returns f rom the quintiles over the f ull
111- year period. There is a perf ect ranking by
prior yield and the dif f erences between quintiles
are large. An investment of one dollar in the low-
est- yielding countries at the start of 1900 would
have grown to USD 370 by the end of 2010, an
annualized return of 5.5%. But the same initial
investment allocated to the highest- yielding coun-
tries would have grown to an end- 2010 value of
more than USD 1,000,000 Ũ some 2,700 times
as much, and equivalent to an annual return of
13.4% per year.
These f igures are bef ore tax and transaction
costs, but the perf ormance gap is too big to be
attributable to tax. The returns shown in Figure 10
are measured in US dollars f rom the perspective
of a US- based global investor. However, the pat-
tern would look the same f rom the perspective of
a global investor f rom any other country. The
returns would just need to be multiplied by the
appropriate common currency scale f actor (pub-
lished in the Sourcebook).
The remaining f ive sets of bars in Figure 10
show the returns over the f our quarter- century
periods making up the 20th century as well as the
returns over the 21st century to date. Over all of
these sub- periods, the high- yielding countries
outperf ormed the low- yielding countries by an
appreciable margin. The results are not theref ore
period- specif ic. Nor are they attributable to risk.
The returns f rom investing in the lowest- yielding
countries were slightly more volatile than investing
in the highest- yielders; the betas against the 19-
country world index were approximately the same;
and the Sharpe ratio was 0.72 f or the portf olio of
highest- yielding countries versus just 0.35 f or the
lowest yielders. Clearly, this multi- country trading
rule based on prior yield would have generated
signif icant prof its at no higher risk.

Fi gure 10
Ret urns f rom select ing market s by yield
Sources: Elroy Dimson, Paul Marsh and Mike Staunton
- 5
0
5
10
15
1900–2010 1900–24 1925–49 1950–74 1975–99 2000–2010
Lowest yield Lower yield Middling yield Higher yield Highest yield
Return (% p.a.)

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _22

Corporat e bonds and t he quest f or i ncome
Equities are not the only income- bearing security
issued by corporations. Companies also issue
pref erence stock, and more importantly, corporate
bonds. Recently, low interest rates, coupled with
continued restraints on bank lending, have led to a
f lood of corporate bond issues. Similarly, the
higher coupons promised f rom corporate, rather
than sovereign, bonds have proved tempting to
investors who are on the quest f or income.
For corporate bonds, the promised yield can
appear misleadingly high because it is predicated
on the assumption that all the cash f lows f rom the
bond Ũ the coupon and repayments Ũ will be paid
on time, with no def aults. Corporate bonds are
subject to credit risk, which ref ers to the probabil-
ity of , and potential loss arising f rom, a credit
event such as def aulting on scheduled payments,
f iling f or bankruptcy, restructuring, or a change in
credit rating.
Historically, the promised yield on US bonds
rated by Moody’ s as Aaa (the highest quality
bonds issued only by blue chip companies) has
been 0.7% higher than on US Treasuries. Baa
bonds, the lowest grade bonds deemed by
Moody’ s still to be “investment grade,” and which
they judge to be “moderate credit risk” have had a
yield spread of 1.9% above Treasuries. But the
key question f or investors is not what the prom-
ised yields have been, but what returns investors
have really achieved.
To answer this question, we look at the long-
run evidence. We have to rely here on the US
experience, as this is the only country f or which
there is good quality, long- run data. Elsewhere,
consistent, reliable corporate bond data has been
available only since the 1990s, and f or some
countries even later, and this f ails to qualif y as
“long run” by the standards of the Yearbook.
Figure 8 of the companion article, Fear of Fal-
ling, showed that the long- run return on the high-
est grade US corporate bonds over the 111 years
f rom 1900 to 2010 was 2.52% per year, which
was 0.68% per year more than on US Treasuries.
This is remarkably close to the promised yield
spread on Aaa bonds, which was 0.70% above
Treasuries.
It is interesting to see whether this return ex-
perience is consistent with def ault rates. The red
line plot in Figure 11 shows the def ault rate over
time on investment grade bonds. This has aver-
aged just 0.15%. Furthermore, the actual def ault
losses are smaller than the def ault rates. Annual
losses can be estimated by multiplying the def ault
rate by one minus the recovery rate, and the latter
has averaged around 40% over time. The average
loss f rom def ault on investment grade bonds has
thus been just 0.09% per annum.
Naturally, the def ault rates on non- investment
grade corporate bonds have been higher. The light
blue line plot in Figure 11 shows the def ault rates
on all rated bonds, including speculative grade or
high- yield bonds, i.e., those rated below Baa.
Here, the def ault rate has averaged 1.14% per
year, while f or high- yield bonds, the average was
2.8%.
Figure 11 shows that there are several spikes
in def ault rates, all coinciding with a recession.
Def ault rates were highest f ollowing the Wall
Street Crash and during the Great Depression,
with the blue line plot in Figure 11 hitting an of f -
the- scale 8.4% in 1933, while high- yield bonds
had a def ault rate that year of 15.4%. The second
worst episode f or def ault rates f ollowed the recent
credit crisis and, in 2009, the def ault rate on all
rated bonds was 5.4%, while that on high- yield
bonds was 13%.
Given the low def ault rates shown in Figure 11
on investment grade bonds, the long- run return
premium of 0.68% per year f or high grade Aaa
rated corporate bonds Ũ which would have had
even lower def ault rates Ũ seems puzzlingly high.
Fi gure 11
Corporat e bond spreads, def ault rat es and equit y volat ilit y
Sources: Elroy Dimson, Paul Marsh and Mike Staunton, Antti Ilmanen Expected Returns (Wiley, 2011),
Moody’ s, Bloomberg, Barclays Capital, Global Financial Data
0
2
4
6
1919 1930 1940 1950 1960 1970 1980 1990 2000 2010
0
25
50
75
Volatility of US equities (% p.a.) Def ault rates: all rated (%)
Baa- Aaa spread (%) Def ault rates: investment grade (%)
Credit spreads and def ault rates (%) Volatility (% p.a.)
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _23

Part of this credit premium is undoubtedly a risk
premium, but given that the risk has generally
been low, it seems likely that other f actors are at
work. For example, corporate bonds are typically
much less liquid than Treasuries, so part of the
credit premium may be compensation f or illiquidity.
Sensible investors will, of course, hold a diver-
sif ied portf olio of corporate bonds, and will thereby
eliminate much of the idiosyncratic risk associated
with corporate bond credit risk. This raises the
question of why corporate bond holders should
expect any risk premium at all. The reason is that
in addition to idiosyncratic risk, corporate bonds
also have market risk (i.e. positive betas) because,
as we have seen f rom Figure 11, def ault is more
likely to occur in recessions when all businesses
are doing poorly.
Figure 11 shows that there is a high correlation
between credit spreads (the dark blue line plot
shows the spread between Baa and Aaa yields)
and US equity market volatility (the grey shaded
area), providing f urther evidence that corporate
bonds f ace considerable market risk. But there is
asymmetry here, with corporate bonds f acing
appreciable tail risk. While relatively saf e f or most
of the time, corporate bonds are highly exposed to
the risk of severe recessions.
Yi el ding t o caut i on
In this article, we have documented the impor-
tance of dividends to investors. We have shown
that, historically, investment strategies tilted to-
wards higher- yielding stocks have generally
proved prof itable. Further, we have shown that an
equity investment strategy tilted towards higher-
yielding markets would have paid of f handsomely.
These f indings have been robust over long pe-
riods and across most countries. While higher risk
would seem an obvious explanation, our research
indicates that portf olios of higher- yielding stocks
(and countries) have actually proved less risky
than an equivalent investment in lower- yielding
growth stocks.
Some cautionary notes are clearly in order.
First, the strategies we have described require a
rigorous rebalancing regime. The resultant portf o-
lios can then of ten appear unappetizing. High-
yield is f requently synonymous with challenged,
troubled or even distressed. It can require courage
to invest in such stocks (and markets). If things go
wrong, as they of ten do, and surely will with at
least some of the portf olio stocks, it is harder to
def end having made such investments. More
popular growth stock stories are easier to justif y.
Second, as with all investment styles, there can
be extended periods when the yield premium goes
into reverse and low- yielders outperf orm. The dark
shaded area in Figure 6 on page 18 shows the
annualized, rolling f ive- year yield premium in the
UK over the last 111 years. It reveals that there
have been extended periods when even the rolling
f ive- year premium has remained negative. These
include the early 1980s, much of the 1990s, and
the present time.
At such times, high- yield investors have needed
to remind themselves that no investment style
remains out of f ashion indef initely. But such peri-
ods can be long enough to severely try the pa-
tience even of those whom we would normally
regard as long- term investors.
Third, we should always be cautious of any
phenomenon when we do not f ully understand its
causes. Perhaps part of the historical yield pre-
mium has arisen f rom taxation. If so, tax systems
today are more neutral between income and capi-
tal gains than was the case in the past. Thus
f uture yield ef f ects may be more muted. While we
have seen that the yield premium is not related to
risk as conventionally def ined, perhaps there is
some dimension of risk that we are missing. If so,
it may reveal itself in an unwelcome way to high-
yield investors of the f uture.
The yield premium across markets may ref lect
historical periods when countries were not inte-
grated internationally, and when market rotation
was not f easible f or the majority of investors. An
investor who chases markets that of f er a high
dividend yield may also be more exposed to politi-
cal risks and an inability to access assets than an
investor who diversif ies globally. The transaction
costs and f ees f or a globally rotated equity portf o-
lio are also larger than f or an international buy-
and- hold strategy.
Many believe that the yield ef f ect is driven by
behavioral f actors, and the tendency of investors
to f all in love with, and overpay f or growth. If so,
then maybe, just maybe, investors will one day
learn their lesson and stop rising to the bait of
growth.

P
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CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _25

This article complements f indings presented in the
Global Investment Returns Yearbook and Source-
book by presenting market- implied returns. The
HOLT f ramework was used to calculate the f or-
ward- looking real cost of capital, which we term
the HOLT discount rate. Historical f orward-
looking results are presented f or US industrials
that indicate that, under certain assumptions, the
real cost of capital and its corresponding ERP
appear to f luctuate signif icantly. We use the re-
sults to identif y risk regimes and comment on
interesting periods. We identif y key drivers to
explain the real cost of capital, which should prove
benef icial in discussions aimed at understanding
the f uture direction of this discount rate.
Finally, we conclude by showing present dis-
count rates f or a number of countries and com-
ment on their market expectations. For instance,
developing and resource- rich markets have opti-
mistic expectations embedded in their equity
prices and trade at lower implied returns than their
developed counterparts. Investors might ask
whether they are being properly compensated f or
the risk they are taking in developing markets.
This paper provides a practical means of assess-
ing risk and its corresponding return, which can be
used in making equity allocation decisions.
What i s t he HOLT di scount rat e?
The HOLT market- implied discount rate is a real
cost of capital solved by equating the market value
of equity and debt to the discounted value of
f uture Free Cash Flow (FCF) generated by
HOLT’ s algorithmic f orecasts, a process similar to
calculating a yield- to- maturity on a bond. The
relationship is diagrammed as f ollows:

Enterprise Value
FCF
i
(1 DR)
i
i 1
N
¦
Forecast
Given
Solve
Enterprise Value
FCF
i
(1 DR)
i
i 1
N
¦
Forecast
Given
Solve


HOLT uses consensus analyst estimates and
its proprietary f ade algorithms to f orecast f uture
asset growth and prof itability, which provide the
necessary ingredients to estimate a f irm' s f uture
f ree cash f low. This calculation is perf ormed on a
Market-implied returns:
Past and present
Estimates of the cost of equity and its equity risk premium (ERP) are based on
historical equity returns and highly dependent on the period studied. The long
history of the Global Investment Returns Yearbook is an outstanding resource
for understanding this time dependency and how it has behaved in various coun-
tries. For example, the country profiles in the Yearbook reveal that the premium
earned over the past decade in many developing countries has far exceeded that
of their developed counterparts. Will this be the case going forward? Spot, for-
ward- looking estimates of market- implied returns coupled with long- term
benchmarks make excellent additions to the toolkit of fund managers and risk
managers, so they can look ahead with a sense of historical balance.
Davi d Hol l and and Bryant Mat t hews, Credit Suisse HOLT
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _26

weekly basis f or various countries and regions.
Once company- specif ic market- implied discount
rates are determined, regression is used to de-
termine the average f orward- looking expected
cost of capital. This f orward- looking proxy may
dif f er f rom the historical asset return series pro-
vided in the Yearbook and Sourcebook since it is
dependent on a f orecast of cash f lows, a chal-
lenging task indeed, and naturally susceptible to
f orecasting errors.
The vital link which lends credibility to this exer-
cise, however, is not the basis of the near- term
cash f low estimates, which are derived f rom con-
sensus analyst earnings expectations, but rather
the application of mean- reverting, empirical f ade
rates to the prof itability (CFROI) and growth f ore-
casts. The use of empirical f ade rates provides a
compelling case- study since it synthesizes invalu-
able historical data with the contemporaneous
views of analysts and investors. When analyst
and/ or investor expectations become overly buoy-
ant or pessimistic, the empirical f ade f ramework
guides the f orecast back within the bounds of
normalcy. The resulting cost of capital is crucially
sensitive, theref ore, to periods of euphoria and
despair, providing a powerf ul signal during these
moments f or investors who place f aith in mean
reversion. The results in this paper are enterprise
value- weighted discount rates f or industrial f irms,
i.e., non- f inancials, in each country or region
studied.
1

Hi st ori cal US market -i mpl i ed di scount rat e
We’ ve calculated the weighted- average real dis-
count rate f or US industrial f irms back to 1950
using the HOLT f ramework. Monthly results were
calculated as of 1975. A high discount rate is
indicative of a risk- averse market where investors
demand more return on their capital due to f ears
about the f uture. Extraordinarily high discount
rates indicate panic and excessive f ear. A low
discount rate is symptomatic of a market with a
greedy risk appetite. Extraordinarily low discount
rates indicate euphoria and excessive greed. The
results can be seen in Figure1.
The f irst thing to note is that the market- implied
discount rate rarely rests at its median of 5.8%.
The market veers between states of greed and
panic, or, in today’ s parlance, “risk on” and “risk
of f .” To give a sense f or dif f erent risk regimes, we
divided the chart into quartiles. The top quartile
sits at 7.1% and indicates a super- chilled risk-
averse market. The bottom quartile sits at 5.1%
and yields below it are indicative of an overheated,
risk- hungry market. These states are illustrated in
Figure 2.
From 1970 to 1985, except f or a brief respite
in the mid- 1970s, the chart indicates that the US
real discount rate was marooned above 7%.
Ronald Reagan spoke of the “days of malaise”
when running f or the US presidency – it was more
like a decade and a half of malaise. Matters were
f lipped on the head in the 1990s. Corporate prof -
itability improved dramatically and risk appetite
swelled, with the discount rate f alling f rom 6.4%
in January 1990 to a low yield of 2.5% at the
peak of the Tech Bubble in early 2000.


1
Please contact the HOLT team at Credit Suisse f or more
details about the HOLT framework and the discount rate calcula-
tion. If you would like to study the CFROI framework and its
mechanics, please see “Beyond Earnings: A User’ s Guide to
Excess Return Models and the HOLT CFROI® Framework" by
David Holland and Tom Larsen.
Fi gure 2
Discount rat e t hermomet er
Source: Credit Suisse HOLT
Overheat ed market: US DR < 5. 1%
Neutral market: US DR = 5.8%
Super-chilled market: US DR > 7.1%
Overheat ed market: US DR < 5. 1%
Neutral market: US DR = 5.8%
Super-chilled market: US DR > 7.1%

Fi gure 1
Time series of market -derived discount rat es – USA
Source: Credit Suisse HOLT, 17 January 2011
Jan 1950 - Jan 2011
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(
%
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USA DR 25%il e Medi an 75%il e
Current DR: 5.1 25th perc ent ile: 5. 1 Medi an: 5. 8 75th percentil e: 7.1
Jan 1950 - Jan 2011
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(
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USA DR 25%il e Medi an 75%il e
Current DR: 5.1 25th perc ent ile: 5. 1 Medi an: 5. 8 75th percentil e: 7.1

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _27

The US discount rate remained below 5% f rom
1996 until 2008. Af ter Lehman Brothers col-
lapsed in September 2008, the US discount rate
rocketed to a bearish 7.8%. At the time, many
investors were of the view that the discount rate
would remain elevated f or years to come. In f act,
risk appetite returned with hibernating hunger.
Today, the US discount rate is 5.1%.
The HOLT discount rate is usef ul as a quantita-
tive gauge of the market' s risk appetite. Dis-
agreement about its level and implicit signal
should be welcomed because it can lead to a
healthy debate about f uture projections within a
well- def ined f ramework. Will f uture prof itability
and growth really be brighter in times of blue- sky
optimism, or will the world really be so dark in
times of pessimism? The signal is only as good as
the f orecast assumptions. Extreme bouts of opti-
mism and pessimism generally indicate a loss of
f aith in mean reversion.
By knowing the discount rate DR, the market
leverage xD and estimating the corporate cost of
debt rD, we can estimate the market- implied ERP
via these equations:

DR = xDrD + (1 – xD)rE

rE = rf + ERP

The risk- f ree rate is denoted by rf and the mar-
ket- implied cost of equity by rE. We use the 10-
year Treasury bond as a proxy f or the risk- f ree
rate. Please note that there is no tax shield term
in the discount rate equation due to the f act that
HOLT captures tax shields in its cash f low calcu-
lation. Our estimate of the market- implied ERP is
shown in Figure 3.
Again, we have divided the chart into quartiles
to give an indication of dif f erent risk regimes.
Readers should remember that the ERP at each
point in time is f orward- looking: risk hungry mar-
kets will have a low ERP and risk- averse markets
will have a high ERP. Since 1960, the median
ERP f or the US has been 4%, which is in line with
the long- term f indings of the Yearbook, i.e., 4.4%
is the premium f or the US equities versus bonds
over the past 111 years.
The market- implied ERP varies signif icantly. It
dipped below 0% during the Tech Bubble, indicat-
ing that risk appetite was overzealous. At the peak
of the Credit Bubble in the “Noughties,” the ERP
sat at 2% or less, again indicating a ravenous
appetite f or risk. The ERP estimate over the past
year has been attractive in large part due to the
low real yields of US Treasuries. We’ ve seen the
bond yield increase since November due to
greater conf idence in a global recovery. This in-
crease has put a squeeze on the US ERP and will
take the shine of f equities if it continues to climb
to its norm. Today’ s US ERP estimate has
dropped to 5.1%.
Readers with an eye f or contradiction might be
asking the question, “How do you reconcile the
sell signal of Figure 1 with the buy signal of Figure
3?” Times are anything but ordinary, and we see
this argument occurring in today' s f inancial press.
Analysts looking at long- term valuation metrics
such as Robert Shiller’ s CAPE generally ref er to
today' s US stock market as expensive. Those who
f ocus on yields relative to Treasuries label the US
stock market attractive. Our results agree with
both f indings, i.e. the discount rate signal (Figure
1) indicates that equities are expensive relative to
their long- term history, while the ERP is attractive
(Figure 3). We would caution bullish investors that
the risk premium will only stay high so long as
Treasury yields remain low. A robust global recov-
ery would stoke inf lation and long- term Treasury
yields. This is not to say that markets will not run
f urther; the charts show that risk appetite is f ar
f rom outright euphoria. If anything, our results
indicate that markets are as much psychological
and irrational as they are f undamental and ra-
tional, so good news can translate into positive
market momentum leading to higher share prices,
which are ref lected in lower discount rates.
Di scount rat e dri ver model
We have seen that the discount rate is a powerf ul
quantitative signal, especially in times of euphoria
and despair. This prompts the question, “can it be
explained and possibly predicted?” In this section,
we identif y explanatory f actors and generate a set
of questions investors should ask themselves.
Fi gure 3
Market -implied equit y risk premium – USA
Source: Credit Suisse HOLT, 17 January 2011
Jan 1960 - Jan 2011
-4%
-2%
0%
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8%
10%
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Equity risk premium 25%ile Median 75%ile
Current ERP: 5. 1 25th percentile: 2.4 Median: 4. 0 75th percent ile: 5. 4
Jan 1960 - Jan 2011
-4%
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Equity risk premium 25%ile Median 75%ile
Current ERP: 5. 1 25th percentile: 2.4 Median: 4. 0 75th percent ile: 5. 4

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _28

Investors’ required rate of return is inf luenced by
historical and current events, based on the as-
sumption that the f uture will in some sense be
similar to the past. Expectations of f uture out-
comes also drive risk concerns. HOLT’ s discount
rate can be decomposed into key economic driv-
ers to highlight how the risk premium has evolved
historically, and which f actors are contributing
most at any given point in time.
Intuitively, investors demand a rate of return on
equities at least as much as the risk- f ree rate. In
f act, a premium is required f or investing in less-
saf e equities over Treasuries. The f irst two statis-
tically signif icant discount rate drivers are the real
risk- f ree rate and the spread of BBB credit over
the risk- f ree rate.
Investor tax rates also inf luence the cost of
capital as they diminish investors’ af ter- tax return.
Capital gains and dividends tax rates tested as
signif icant drivers, and could drive the discount
rate higher if governments chasing tax revenue
punish investors. Volatility creates uncertainty,
which f eeds into a higher cost of capital. We
f ound that the industrial production volatility
proved to be a signif icant driver of the discount
rate. Expectations of higher inf lation f uel higher
ef f ective real tax rates f or investors. Conse-
quently, inf lation is also a signif icant discount rate
driver. The ef f ect of each driver over time can be
seen in Figure 4.
Table 1 shows an investor’ s average required
return per economic indicator. These results pro-
vide more than mathematical curiosities. Shrewd
investors can take positions on the f uture direction
of each driver and contemplate the direction of
f uture discount rate moves. Key questions to ask
when considering which way the discount rate
might move include:

ƒ Where is the yield on the 10- year Treasury
heading?
ƒ Will credit spreads tighten?
ƒ Will volatility remain subdued or increase?
ƒ Will investor taxes increase?
ƒ Will markets experience hyper- inf lation, def la-
tion or moderate inf lation?
Worl dwi de market -i mpl i ed di scount rat es
What about today' s real discount rate f or other
markets? Are they expensive or cheap? How do
they compare to their respective histories? We
have plotted the results f or the G20 (plus Switzer-
land) in a box- and- whisker chart in Figure 5. The
chart shows today' s discount rate f or each country
along with its minimum, median and maximum
values over the past decade, and the 25th and
75th percentile values.
The chart goes from countries with low market-
implied returns at the left to countries with high
returns at the right, i.e., greatest to the least risk
appetite. It is clear that developing and resource-
rich markets dominate the left- hand side of the
chart. Clearly, investors have pushed the valuations
of these markets into dear territory. Behavioral
studies routinely show that human beings tend to
overestimate growth and are overly optimistic.
These hallmarks appear to be embedded in market
expectations for developing markets, so caution is
warranted. At the other end of the spectrum, we
can see that markets are not particularly sanguine
about Europe and Japan. The notion of risk ap-
pears to have been flipped on its head and mirrors
investor enthusiasm for emerging markets in 2010.
Investors need to ask if they are being properly
compensated f or the risk they are taking in devel-
oping markets. Bullish investors are encouraged to
compare their forecasts to the mean reverting
assumptions employed in the HOLT estimates.
Fi gure 4
Cont ribut ion of various discount rat e drivers
Source: Credit Suisse HOLT 17 January 2011
HOLT Risk Attribution Model
-1
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Inflation
IP volatility
Marginal tax rates
Over corporates
Over risk-free
LT real yield 1.5%
Discount rate
HOLT Risk Attribution Model
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2

m
1
1
9
8
4

m
1
1
9
8
6

m
1
1
9
8
8

m
1
1
9
9
0

m
1
1
9
9
2

m
1
1
9
9
4

m
1
1
9
9
6

m
1
1
9
9
8

m
1
2
0
0
0

m
1
2
0
0
2

m
1
2
0
0
4

m
1
2
0
0
6

m
1
2
0
0
8

m
1
2
0
1
0

m
1
Inflation
IP volatility
Marginal tax rates
Over corporates
Over risk-free
LT real yield 1.5%
Discount rate
Table 1
Component ri sk cont ri but i on
Source: Credit Suisse HOLT
Expl anat ory f act or Average Mi n. Dat e Max. Dat e
Inflation 1.87 –0.95 2009m7 6.69 1980m3
Industrial production volatility 1.72 1.09 1989m1 2.68 1976m2
US Treasury yield (real rate) 1.20 –1.52 1980m6 3.53 1983m8
Corporate bond yield 0.73 0.31 1978m12 2.04 2008m12
Marginal tax rates 0.49 –0.37 1981m1 1.00 1988m1
Average real discount rate 6.00
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _29

When using this chart, it is recommended that
you consider the absolute yield relative to the
long- term discount rate thermometer, and then
each country relative to itself . Bearing the f irst
condition in mind, all countries below 5% should
beg the question, “Is the valuation f or this market
rich?” The degree of alarm can be gauged f rom
the country' s behavior relative to itself over the
past decade, which is the second test in the event
of idiosyncratic issues. Argentina, Mexico and
Brazil lie below 5% and are trading at decade low
yields. They appear to be overbought unless in-
vestors believe our mean reverting f orecasts f or
them are too pessimistic. Russia and Korea trade
at high yields due to idiosyncratic risks but are
presently trading at low yields relative to their
respective histories. In the case of Russia, inves-
tors are particularly concerned about corporate
governance and we believe this concern is re-
f lected in the discount rate. Investors who believe
these f ears are overblown should view Russia as
attractive value.
We estimate the ERP f or key regions in Figure
6, and see that the ERP f or developed markets is
f ar more attractive than the ERP f or developing
markets. This prompts the question of whether
equity investors will be compensated f or the extra
risk they are taking in developing markets. Con-
trarians might counter that developed markets are
riskier but would benef it f rom ref lecting on the
wide gap in the ERP estimates.
Gaugi ng market at t ract i veness
We have shown how the HOLT discount rate can be
used to quantify risk appetite and indicate stock
market attractiveness. Results for the USA over the
past 60 years give a long-term sense for risk appe-
tite regimes and were used to estimate a market-
implied ERP time series. Suffice to say, risk appetite
can vary significantly! Today' s US discount rate
indicates an expensive market, while today' s ERP for
the USA indicates that it is attractive.
We investigated and quantif ied drivers of the
discount rate. We translated those drivers into
questions investors should consider when trying to
understand the f uture trajectory of the discount
rate. We concluded the paper by commenting on
today' s discount rates f or the G20 (plus Switzer-
land). Today' s yields indicate that developing and
resource- rich markets are trading at relatively
expensive prices. One could conclude that f uture
growth and optimism are already embedded in
their market expectations. Mature, developed
markets look attractive in comparison.
Fi gure 6
Market -implied ERP est imat es f or various regions
Source: Credit Suisse HOLT 17 January 2011
2.3
3.5
1.1 1.1
2.3 2.1
2.6
2.7
5. 1
6.1
6.1
6.8
0
2
4
6
8
10
Japan Europe UK USA Emerging APxJ
C
o
s
t

o
f

E
q
u
i
t
y

(
%
)
Equity risk premium Risk free rate BBB 7–10 year yield
2.3
3.5
1.1 1.1
2.3 2.1
2.6
2.7
5. 1
6.1
6.1
6.8
0
2
4
6
8
10
Japan Europe UK USA Emerging APxJ
C
o
s
t

o
f

E
q
u
i
t
y

(
%
)
Equity risk premium Risk free rate BBB 7–10 year yield

Fi gure 5
Ent erprise value-weight ed market -derived discount rat es – by count ry
Source: Credit Suisse HOLT, 17 January 2011
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
C
h
in
a
I
n
d
o
n
e
s
i
a
H
o
n
g

K
o
n
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S
a
u
d
i

A
r
a
b
ia
A
r
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e
n
t
i
n
a
I
n
d
i
a
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o
u
t
h

A
f
r
i
c
a
A
u
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a
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i
c
o
C
a
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a
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a
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i
t
e
d

S
t
a
t
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s
B
r
a
z
il
S
w
i
t
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r
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a
n
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d

K
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g
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T
u
r
k
e
y
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a
n
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e
r
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e
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s
s
i
a
D
i
s
c
o
u
n
t

R
a
t
e

(
%
)
10- year median DR Discount rate
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
C
h
in
a
I
n
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i
a
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o
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K
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A
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ia
A
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a
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A
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A
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S
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S
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s
i
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o
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t

R
a
t
e

(
%
)
10- year median DR Discount rate
P
H
O
T
O
.

I
S
T
O
C
K
P
H
O
T
O
CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_31

Gui de t o t he count ry prof i l es
Individual
markets
El r oy Di mson, Paul Mar sh and Mi ke St aunt on
London Business School
The Credit Suisse Global Invest ment Ret urns Yearbook
covers 22 count ries and regions, all wit h index series
t hat st art in 1900. Figure 1 shows t he relat ive sizes of
world equit y market s at our base dat e of end- 1899.
Figure 2 shows how t hey had changed by end- 2010.
Market s t hat are not included in t he Yearbook dat aset
are colored in black. As t hese pie chart s show, t he
Yearbook covered 89% of t he world equit y market in
1900 and 83% by end- 2010.
In t he count ry pages t hat f ollow, t here are t hree chart s
f or each count ry or region. The upper chart report s, f or
t he last 111 years, t he real value of an init ial invest ment
in equit ies, long- t erm government bonds, and Treasury
bills, all wit h income reinvest ed. The middle chart
report s t he annualized premium achieved by equit ies
relat ive t o bonds and t o bills, measured over t he last
decade, quart er- cent ury, half - cent ury, and f ull 111
years. The bot t om chart compares t he 111- year
annualized real ret urns, nominal ret urns, and st andard
deviat ion of real ret urns f or equit ies, bonds, and bills.
The count ry pages provide dat a f or 19 count ries, list ed
alphabet ically st art ing on t he next page, and f ollowed by
t hree broad regional groupings. The lat t er are a 19-
count ry world equit y index denominat ed in USD, an
analogous 18- count ry world ex- US equit y index, and an
analogous 13- count ry European equit y index. All equit y
indexes are weight ed by market capit alizat ion (or, in
years bef ore capit alizat ions were available, by GDP). We
also comput e bond indexes f or t he world, world ex- US
and Europe, wit h count ries weight ed by GDP.
Ext ensive addit ional inf ormat ion is available in t he Credit
Suisse Global Invest ment Ret urns Sourcebook 2011.
This 200- page ref erence book, which is available
t hrough London Business School, cont ains bibliographic
inf ormat ion on t he dat a sources f or each count ry. The
underlying dat a are available t hrough Morningst ar Inc.


The Year book’ s gl obal coverage
The Yearbook cont ains annual ret urns on st ocks, bonds, bills, inf lat ion,
and currencies f or 19 count ries f rom 1900 t o 2010. The count ries
comprise t wo Nort h American nat i ons (Canada and t he USA), eight
euro- currency area st at es (Belgium, Finland, France, Germany, Ireland,
It aly, t he Net herlands, and Spain), f ive European market s t hat are
out side t he euro area (Denmark, Norway, Sweden, Swit zerland, and t he
UK), t hree Asia- Pacif ic count ries (Aust ralia, Japan, and New Zealand),
and one Af rican market (Sout h Af rica). These count ries covered 89 % of
t he global st ock market in 1 900, and 83% of it s market capit alizat ion
by t he st art of 20 11.

Fi gur e 1
Rel at i ve si zes of worl d st ock market s, end-1899

UK 30.5%
USA 19.3%
France 14.3%
Netherlands 1.6%
Germany 6.9%
Japan 4.0%
Russia 3.9%
Austria- Hungary 3.5%
Belgium 3.8%
Canada 1.8%
Italy 1.6%
Other Yearbook 5.1%
Other 3.6%
UK 30.5%
USA 19.3%
France 14.3%
Netherlands 1.6%
Germany 6.9%
Japan 4.0%
Russia 3.9%
Austria- Hungary 3.5%
Belgium 3.8%
Canada 1.8%
Italy 1.6%
Other Yearbook 5.1%
Other 3.6%
Fi gur e 2
Rel at i ve si zes of worl d st ock market s, end-2010

Japan 8.2%
Other 16.9%
UK 8.1%
Sweden 1.3%
Canada 4.1%
France 3.9%
Australia 3.4%
Switzerland 3.0%
Germany 3.2%
Spain 1.4%
Other Yearbook 5.2%
USA 41.4%
Japan 8.2%
Other 16.9%
UK 8.1%
Sweden 1.3%
Canada 4.1%
France 3.9%
Australia 3.4%
Switzerland 3.0%
Germany 3.2%
Spain 1.4%
Other Yearbook 5.2%
USA 41.4%

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

Bi bl i ography and dat a sources
1. Dimson, E., P. R. Marsh and M. Staunton, 2002, Triumph of t he
Opt imist s, NJ: Princeton University Press
2. Dimson, E., P. R. Marsh and M. Staunton, 2008, The worldwide equity
premium: a smaller puzzle, R Mehra (Ed.) The Handbook of t he Equit y
Risk Premium, Amsterdam: Elsevier
3. Dimson, E., P. R. Marsh and M. Staunton, 2011, Credit Suisse Global
Invest ment Ret urns Sourcebook 2 011, Zurich: Credit Suisse Research
Institute
4. Dimson, E., P. R. Marsh and M. Staunton, 2011, The Dimson- Marsh-
St aunt on Global Invest ment Ret urns Dat abase, Morningstar Inc. (t he
“DMS” dat a module)


CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_32


Aust ral i a
The lucky
country
Aust ralia is of t en described as “t he Lucky Count ry” wit h
ref erence t o it s nat ural resources, prosperit y, weat her,
and dist ance f rom problems elsewhere in t he world. But
maybe Aust ralians make t heir own luck: in 2011 t he
Herit age Foundat ion ranked Aust ralia as t he count ry
wit h t he highest economic f reedom in t he world, beat en
only by a couple of cit y- st at es t hat also score highly.
Whet her it is down t o luck or good economic
management , Aust ralia has been t he best - perf orming
equit y market over t he 111 years since 1900, wit h a
real ret urn of 7. 4% per year.
The Aust ralian Securit ies Exchange (ASX) has it s origins
in six separat e exchanges, est ablished as early as 1861
in Melbourne and 1871 in Sydney, well bef ore t he
f ederat ion of t he Aust ralian colonies t o f orm t he
Commonwealt h of Aust ralia in 1901. The ASX is now
t he world’ s sixt h- largest st ock exchange. More t han half
t he index is represent ed by banks (28%) and mining
(23%), while t he largest st ocks at t he st art of 2011 are
BHP Billit on, Commonwealt h Bank of Aust ralia, and
West pac.
Aust ralia also has a signif icant government and
corporat e bond market , and is home t o t he largest
f inancial f ut ures and opt ions exchange in t he Asia-
Pacif ic region. Sydney is a major global f inancial cent er.



Capi t al market ret urns f or Aust ral i a
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 2862. 1 as compared t o 4. 9
f or bonds and 2. 1 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 5. 9% and bills by 6 . 7% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Aust ralian equit ies was an annualized 7. 4%
as compared t o bonds and bills, which gave a real ret urn of 1. 4 % and
0. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
2,862
4.9
2.1
0
1
10
100
1,000
10,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
2.7
3.5
6.7
0.5
3.5
5.9
3.1
3.2
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
7.4
11.6
18.2
1.4 5.4
13.2
0.7 4.6
5.4
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_33


Bel gi um
At the heart
of Europe
Lit huania claims t o lie at t he geographical heart of
Europe, but Belgium can also assert cent ralit y. It lies at
t he crossroads of Europe’ s economic backbone and it s
key t ransport and t rade corridors, and is t he
headquart ers of t he European Union. In 2010, Belgium
was ranked t he most globalized of t he 181 count ries
t hat are evaluat ed by t he KOF Index of Globalizat ion.
Belgium’ s st rat egic locat ion has been a mixed
blessing, making it a major bat t leground in t wo world
wars. The ravages of war and at t endant high inf lat ion
rat es are an import ant cont ribut ory f act or t o it s poor
long- run invest ment ret urns – Belgium has been one of
t he t wo worst - perf orming equit y market s and t he sixt h
worst perf orming bond market .
The Brussels st ock exchange was est ablished in 1801
under French Napoleonic rule. Brussels rapidly grew
int o a major f inancial cent er, specializing during t he
early 20t h cent ury in t ramways and urban t ransport .
It s import ance has gradually declined, and Euronext
Brussels suf f ered badly during t he recent banking
crisis. Three large banks made up a majorit y of it s
market capit alizat ion at st art - 2008, but t he banking
sect or now represent s only 6% of t he index. At t he
st art of 2011, more t han half of t he index was invest ed
in just t wo companies: Anheuser- Busch (45%) and
Delhaize (7%).




Capi t al market ret urns f or Bel gi um
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 16. 2 as compared t o 0. 9
f or bonds and 0. 7 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 2. 6% and bills by 2 . 9% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Belgium equit ies was an annualized 2. 5 %
as compared t o bonds and bills, which gave a real ret urn of –0. 1%
and –0. 3% respect ively. For addit ional explanat ions of t hese f igures,
see page 3 1.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
16
0.9
0.7
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
2.1
2.9
-4.7
0.2
1.0 2.6
3.1
-2.1
-10
-5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
2.5
8.0
23.6
- 0.1
5.2
12.0
- 0.3
5.0
8.0
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_34


Canada
Resourceful
country
Canada is t he world’ s second- largest count ry by land
mass (af t er Russia), and it s economy is t he t ent h- largest .
As a brand, it is rat ed number one out of 110 count ries
monit ored in t he lat est Count ry Brand Index. It is blessed
wit h nat ural resources, having t he world’ s second- largest
oil reserves, while it s mines are leading producers of
nickel, gold, diamonds, uranium and lead. It is also a
major export er of sof t commodit ies, especially grains and
wheat , as well as lumber, pulp and paper.
The Canadian equit y market dat es back t o t he opening of
t he Toront o St ock Exchange in 1861 and is t he world’ s
f ourt h- largest , account ing f or 4. 1% of world capit alizat ion.
Canada also has t he world’ s nint h- largest bond market .
Given Canada’ s nat ural endowment , it is no surprise t hat
oil and gas and mining st ocks have a 38% weight ing in it s
equit y market , while a f urt her 33% is account ed f or by
f inancials. The largest st ocks are current ly Royal Bank of
Canada, Toront o- Dominion Bank and Suncor Energy.
Canadian equit ies have perf ormed well over t he long run,
wit h a real ret urn of 5. 9% per year. The real ret urn on
bonds has been 2. 1% per year. These f igures are close t o
t hose f or t he Unit ed St at es.



Capi t al market ret urns f or Canada
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 550. 9 as compared t o 1 0. 0
f or bonds and 5. 7 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 3. 7% and bills by 4 . 2% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Canadian equit ies was an annualized 5. 9%
as compared t o bonds and bills, which gave a real ret urn of 2. 1 % and
1. 6% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
551
10.0
5.7
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
3.1
4.2
- 0.9
- 0.7
1.7
3.7
3.4
3.8
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.9
9.1
17.2
2.1
5.2
10.4
1.6
4.7 4.9
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_35


Denmark
Happiest
nation
In a 2011 met a- survey published by t he Nat ional Bureau
of Economic Research, Denmark was ranked t he
happiest nat ion on eart h, closely f ollowed by Sweden,
Swit zerland, and Norway.
What ever t he source of Danish happiness, it does not
appear t o spring f rom out st anding equit y ret urns. Since
1900, Danish equit ies have given an annualized real
ret urn of 5. 1%, which, while respect able, is below t he
world ret urn of 5. 5%.
In cont rast , Danish bonds gave an annualized real ret urn
of 3. 0%, t he highest among t he Yearbook count ries.
This is because our Danish bond ret urns, unlike t hose
f or t he ot her 18 count ries, include an element of credit
risk. The ret urns are t aken f rom a st udy by Claus
Parum, who f elt it was more appropriat e t o use
mort gage bonds, rat her t han more t hinly t raded
government bonds.
The Copenhagen St ock Exchange was f ormally
est ablished in 1808, but can t race it s root s back t o t he
lat e 17t h cent ury. The Danish equit y market is relat ively
small. It has a high weight ing in healt hcare (51%) and
indust rials (19%), and t he largest st ocks list ed in
Copenhagen are Novo- Nordisk, Danske Banking, and
AP Moller–Maersk.



Capi t al market ret urns f or Denmark
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 247. 6 as compared t o 2 7. 9
f or bonds and 11 . 9 f or bills. Figure 2 shows t hat , since 1900 , equit ies
beat bonds by 2. 0% and bills by 2 . 8% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Danish equit ies was an annualized 5. 1% as
compared t o bonds and bills, which gave a real ret urn of 3. 0 % and
2. 3% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
248
27.9
11.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
3.3
2.8
0.9
0.7
1.2
2.0
3.3
3.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.1
9.2
20.9
3.0
7.1
11.7
2.3
6.2 6.0
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_36


Fi nl and
East meets
West
Wit h it s proximit y t o t he Balt ic and Russia, Finland is a
meet ing place f or East ern and West ern European
cult ures. This count ry of snow, swamps and f orest s –
one of Europe’ s most sparsely populat ed nat ions – was
part of t he Kingdom of Sweden unt il sovereignt y
t ransf erred in 1809 t o t he Russian Empire. In 1917,
Finland became an independent count ry.
Newsweek magazine ranks Finland as t he best count ry
t o live in t he whole world in it s August 2010 survey of
educat ion, healt h, qualit y of lif e, economic
compet it iveness, and polit ical environment of 100
count ries. A member of t he European Union since
1995, Finland is t he only Nordic st at e in t he euro
currency area.
The Finns have t ransf ormed t heir count ry f rom a f arm
and f orest - based communit y t o a diversif ied indust rial
economy operat ing on f ree- market principles. The
OECD ranks Finnish schooling as t he best in t he world.
Per capit a income is among t he highest in West ern
Europe.
Finland excels in high- t ech export s. It is home t o Nokia,
t he world’ s largest manuf act urer of mobile t elephones,
which has been rat ed t he most valuable global brand
out side t he USA. Forest ry, an import ant export earner,
provides a secondary occupat ion f or t he rural populat ion.
Finnish securit ies were init ially t raded over- t he- count er
or overseas, and t rading began at t he Helsinki St ock
Exchange in 1912. Since 2003, t he Helsinki exchange
has been part of t he OMX f amily of Nordic market s. At
it s peak, Nokia represent ed 72% of t he value- weight ed
HEX All Shares Index, and Finland is a highly
concent rat ed st ock market . The largest Finnish
companies are current ly Nokia (31% of t he market ),
Sampo, and Fort um.



Capi t al market ret urns f or Fi nl and
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 334. 2 as compared t o 0. 8
f or bonds and 0. 6 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 5. 6% and bills by 5 . 9% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Finnish equit ies was an annualized 5. 4%,
as compared t o bonds and bills, which gave a real ret urn of –0. 2%
and –0. 5% respect ively. For addit ional explanat ions of t hese f igures,
see page 3 1.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
334
0.8
0.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 7.3
5.1
5.9
4.6 4.6
5.6
6.8
- 4.4
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.4
13.1
- 0.2
7.1
13.7
- 0.5
6.8
11.9
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills
30.3

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_37


France
European
center
Paris and London compet ed vigorously as f inancial
cent ers in t he 19t h cent ury. Af t er t he Franco- Prussian
War in 1870, London achieved dominat ion. But Paris
remained import ant , especially, t o it s lat er disadvant age,
in loans t o Russia and t he Medit erranean region,
including t he Ot t oman Empire. As Kindelberger, t he
economic hist orian put it , “London was a world f inancial
cent er; Paris was a European f inancial cent er. ”
Paris has cont inued t o be an import ant f inancial cent er
while France has remained at t he cent er of Europe,
being a f ounder member of t he European Union and t he
euro. France is Europe’ s second- largest economy. It has
t he largest equit y market in Cont inent al Europe, ranked
f if t h in t he world, and t he f ourt h- largest bond market in
t he world. At t he st art of 2011, France’ s largest list ed
companies were Tot al, Sanof i–Avent is, and BNP–
Paribas.
Long- run French asset ret urns have been disappoint ing.
France ranks 16t h out of t he 19 Yearbook count ries f or
equit y perf ormance, 15t h f or bonds and 18t h f or bills. It
has had t he t hird- highest inf lat ion, hence t he poor f ixed
income ret urns. However, t he inf lat ionary episodes and
poor perf ormance dat e back t o t he f irst half of t he 20t h
cent ury and are linked t o t he world wars. Since 1950,
French equit ies have achieved mid- ranking ret urns.



Capi t al market ret urns f or France
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 28. 5 as compared t o 0. 8
f or bonds and 0. 04 f or bills. Figure 2 shows t hat , since 1900 , equit ies
beat bonds by 3. 2% and bills by 6 . 0% per year. Figure 3 shows t hat
t he long- t erm real ret urn on French equit ies was an annualized 3. 1%,
as compared t o bonds and bills, which gave a real ret urn of –0. 1%
and –2. 8% respect ively. For addit ional explanat ions of t hese f igures,
see page 3 1.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
28
0.8
0.04
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.1
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 6.0
3.6
6.0
0.0
- 0.9
3.2
3.8
- 2.6
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
3.1
10.5
23.5
- 0.1
7.1
13.0
- 2.8
4.2
9.6
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_38


Germany
Locomotive
of Europe
German capit al market hist ory changed radically af t er
World War II. In t he f irst half of t he 20t h cent ury,
German equit ies lost t wo- t hirds of t heir value in World
War I. In t he hyperinf lat ion of 1922–23, inf lat ion hit 209
billion percent , and holders of f ixed income securit ies
were wiped out . In World War II and it s immediat e
af t ermat h, equit ies f ell by 88% in real t erms, while
bonds f ell by 91%.
There was t hen a remarkable t ransf ormat ion. In t he early
st ages of it s “economic miracle, ” German equit ies rose
by 4, 094% in real t erms f rom 1949 t o 1959. Germany
rapidly became known as t he “locomot ive of Europe. ”
Meanwhile, it built a reput at ion f or f iscal and monet ary
prudence. From 1949 t o dat e, it has enjoyed t he world’ s
lowest inf lat ion rat e, it s st rongest currency (now t he
euro), and t he second best - perf orming bond market .
Today, Germany is Europe’ s largest economy. Formerly
t he world’ s t op export er, it has now been overt aken by
China. It s st ock market , which dat es back t o 1685,
ranks sevent h in t he world by size, while it s bond market
is t he world’ s sixt h- largest .
The German st ock market ret ains it s bias t owards
manuf act uring, wit h weight ings of 20% in indust rials,
19% in consumer goods, and 19% in basic mat erials.
The largest st ocks are Siemens, BASF, Daimler, and
E. ON.



Capi t al market ret urns f or Germany
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 28. 3 as compared t o 0. 1 2
f or bonds and 0. 07 f or bills. Figure 2 shows t hat , since 1900 , equit ies
beat bonds by 5. 4% and bills by 5 . 9% per year. Figure 3 shows t hat
t he long- t erm real ret urn on German equit ies was an annualized 3. 1 %
as compared t o bonds and bills, which gave a real ret urn of –1. 9%
and –2. 4% respect ively. We exclude 1922 –23 f or all series except real
equit y ret urns. For f urt her explanat ions of t hese f igures, see page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
28
0.12
0.07
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.1
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 4.3
2.1
5.9
- 0.8
- 0.1
5.4
1.6
- 1.0
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
3.1
8.3
- 1.9
2.8
15.5
- 2.4
2.3
13.2
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills
32.2

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_39


Irel and
Born free
Ireland was born as an independent count ry in 1922 as
t he Irish Free St at e, f ree at last af t er 700 years of
Norman and lat er Brit ish involvement and cont rol. By t he
1990s and early 2000s, Ireland experienced great
economic success and became known as t he Celt ic
Tiger. The f inancial crisis changed t hat , and t he count ry
is now f acing hardship. Just as t he Born Free
Foundat ion aims t o f ree t igers f rom being held capt ive in
zoos, Ireland now needs t o be saved f rom being a
capt ive of t he economic syst em.
By 2007, Ireland had become t he world’ s f if t h- richest
count ry in t erms of GDP per capit a, t he second- richest
in t he EU, and was experiencing net immigrat ion. Over
t he period 1987–2006, Ireland had t he second- highest
real equit y ret urn of any Yearbook count ry. The count ry
is one of t he smallest Yearbook market s, and sadly, it
has shrunk since 2006. Too much of t he market boom
was based on real est at e, f inancials and leverage, and
Irish st ocks are now wort h only one- t hird of t heir value
at t he end of 2006. At t hat dat e, t he Irish market had a
57% weight ing in f inancials, but by t he beginning of
2011 t hey represent ed only 6% of t he index. The
capt ive t iger now has a smaller bit e.
Though Ireland gained it s independence in 1922, st ock
exchanges had exist ed f rom 1793 in Dublin and Cork. In
order t o monit or Irish st ocks f rom 1900, we const ruct ed
an index f or Ireland based on st ocks t raded on t hese
t wo exchanges. In t he period f ollowing independence,
economic growt h and st ock market perf ormance were
weak, and during t he 1950s t he count ry experienced
large- scale emigrat ion. Ireland joined t he European
Union in 1973, and f rom 1987 t he economy improved. It
swit ched it s currency f rom t he punt t o t he euro in
January 2002, and all invest ment ret urns ref lect t he
st art - 2002 currency conversion f act or.



Capi t al market ret urns f or Irel and
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 59. 8 as compared t o 2. 6
f or bonds and 2. 2 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 2. 9% and bills by 3 . 0% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Irish equit ies was an annualized 3. 8 % as
compared t o bonds and bills, which gave a real ret urn of 0. 9 % and
0. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
60
2.6
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 6.2
4.1
3.0
0.5
3.5
2.9
2.4
- 6.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
3.8
8.2
23.2
0.9
5.2
14.9
0.7
5.0
6.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_40


It al y
Banking
innovators
While banking can t race it s root s back t o Biblical t imes,
It aly can claim a key role in t he early development of
modern banking. Nort h It alian bankers, including t he
Medici, dominat ed lending and t rade f inancing
t hroughout Europe in t he Middle Ages. These bankers
were known as Lombards, a name t hat was t hen
synonymous wit h It alians. Indeed, banking t akes it s
name f rom t he It alian word “banca, " t he bench on which
t he Lombards used t o sit t o t ransact t heir business.
It aly ret ains a large banking sect or t o t his day, wit h
f inancials st ill account ing f or 36% of t he It alian equit y
market . Oil and gas account s f or a f urt her 23%, and t he
largest st ocks t raded on t he Milan St ock Exchange are
Eni, Unicredit o, and Enel.
Sadly, It aly has experienced some of t he poorest asset
ret urns of any Yearbook count ry. Since 1900, t he
annualized real ret urn f rom equit ies has been 2. 0%, t he
lowest ret urn out of 19 count ries. Apart f rom Germany,
wit h it s post - World War I and post - World War II
hyperinf lat ions, It aly has experienced t he second- worst
real bond and worst bill ret urns of any Yearbook count ry,
and t he highest inf lat ion rat e and weakest currency.
Today, It aly’ s st ock market is t he world’ s 17t h largest ,
but it s highly developed bond market is t he world’ s
t hird- largest .



Capi t al market ret urns f or It al y
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 9. 1 as compared t o 0. 2 f or
bonds and 0. 02 f or bills. Figure 2 shows t hat , since 1900, equit ies beat
bonds by 3. 7% and bills by 5. 8% per year. Figure 3 shows t hat t he
long- t erm real ret urn on It alian equit ies was an annualized 2. 0 % as
compared t o bonds and bills, which generat ed annualized real ret urns
of –1. 7 % and –3 . 6% respect ively. For addit ional explanat ions of t hese
f igures, see page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
9
0.2
0.02
0
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.1
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 7.3
5.8
- 3.7
- 1.9
3.7
0.4
0.8
- 5.2
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
2.0
10.6
29.0
- 1.7
6.7
14.1
- 3.6
4.5
11.5
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_41


Japan
Birthplace
of futures
Japan has a long herit age in f inancial market s. Trading
in rice f ut ures had been init iat ed around 1730 in Osaka,
which creat ed it s st ock exchange in 1878. Osaka was t o
become t he leading derivat ives exchange in Japan (and
t he world’ s largest f ut ures market in 1990 and 1991)
while t he Tokyo st ock exchange, also f ounded in 1878,
was t o become t he leading market f or spot t rading.
From 1900 t o 1939, Japan was t he world’ s second-
best equit y perf ormer. But World War II was disast rous
and Japanese st ocks lost 96% of t heir real value. From
1949 t o 1959, Japan’ s “economic miracle” began and
equit ies gave a real ret urn of 1, 565%. Wit h one or t wo
set backs, equit ies kept rising f or anot her 30 years.
By t he st art of t he 1990s, t he Japanese equit y market
was t he largest in t he world, wit h a 40% weight ing in
t he world index versus 32% f or t he USA. Real est at e
values were also riding high and it was alleged t hat t he
grounds of t he Imperial palace in Tokyo were wort h
more t han t he ent ire St at e of Calif ornia.
Then t he bubble burst . From 1990 t o t he st art of 2009,
Japan was t he worst - perf orming st ock market . At t he
st art of 2011 it s capit al value is st ill only one- t hird of it s
value at t he beginning of t he 1990s. It s weight ing in t he
world index f ell f rom 40% t o 8%. Meanwhile, Japan
suf f ered a prolonged period of st agnat ion, banking
crises and def lat ion. Hopef ully, t his will not f orm t he
blueprint f or ot her count ries t hat are hoping t o emerge
f rom t heir own f inancial crises.
Despit e t he f allout f rom t he burst ing of t he asset
bubble, Japan remains a major economic power, wit h
t he world’ s second- largest GDP. It has t he world’ s
second- largest equit y market as well as it s second-
biggest bond market . It is a world leader in t echnology,
aut omobiles, elect ronics, machinery and robot ics, and
t his is ref lect ed in t he composit ion of it s equit y market .



Capi t al market ret urns f or Japan
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 63. 9 as compared t o 0. 3
f or bonds and 0. 12 f or bills. Figure 2 shows t hat , since 1900 , equit ies
beat bonds by 5. 0% and bills by 5 . 9% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Japanese equit ies was an annualized 3. 8%
as compared t o bonds and bills, which gave a real ret urn of –1. 1%
and –1. 9% respect ively. For addit ional explanat ions of t hese f igures,
see page 3 1.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
64
0.3
0.12
0
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
0.1
0.01
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 5.2
2.6
5.9
- 5.3
- 1.4
5.0
- 1.7
- 2.4
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
3.8
11.1
29.8
- 1.1
5.8
20.1
- 1.9
5.0
13.9
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .


CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_42

Net herl ands
Exchange
pioneer
Alt hough some f orms of st ock t rading occurred in
Roman t imes, organized t rading did not t ake place unt il
t ransf erable securit ies appeared in t he 17t h cent ury.
The Amst erdam market , which st art ed in 1611, was t he
world’ s main cent er of st ock t rading in t he 17t h and
18t h cent uries. A book writ t en in 1688 by a Spaniard
living in Amst erdam (appropriat ely ent it led Conf usion de
Conf usiones) describes t he amazingly diverse t act ics
used by invest ors. Even t hough only one st ock was
t raded – t he Dut ch East India Company – t hey had
bulls, bears, panics, bubbles and ot her f eat ures of
modern exchanges.
The Amst erdam Exchange cont inues t o prosper t oday as
part of Euronext . Over t he years, Dut ch equit ies have
generat ed a mid- ranking real ret urn of 5. 0% per year.
The Net herlands also has a signif icant bond market ,
which is t he world’ s 12t h- largest . The Net herlands has
t radit ionally been a low inf lat ion count ry and, since
1900, has enjoyed t he second- lowest inf lat ion rat e
among t he Yearbook count ries (af t er Swit zerland).
The Net herlands has a prosperous open economy. The
largest energy company in t he world, Royal Dut ch Shell,
now has it s primary list ing in London and a secondary
list ing in Amst erdam. But t he Amst erdam Exchange st ill
host s more t han it s share of major mult inat ionals,
including Unilever, ArcelorMit t al, ING Group, and
Philips.



Capi t al market ret urns f or t he Net herl ands
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 218. 0 as compared t o 4. 8
f or bonds and 2. 2 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 3. 5% and bills by 4 . 2% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Dut ch equit ies was an annualized 5. 0% as
compared t o bonds and bills, which gave a real ret urn of 1. 4 % and
0. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
218
4.8
2.2
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 7.1
4.5
4.2
1.7
3.3
3.5
4.2
- 4.0
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.0
8.0
21.8
1.4
4.4
9.4
0.7 3.6
5.0
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_43


New Zeal and
Purity and
integrity
For a decade, New Zealand has been promot ing it self
t o t he world as “100% pure” and Forbes calls t his
market ing drive one of t he world' s t op t en t ravel
campaigns. But t he count ry also prides it self on
honest y, openness, good governance, and f reedom t o
run businesses. According t o Transparency
Int ernat ional, in 2010 New Zealand was perceived as
t he least corrupt count ry in t he world. The Wall St reet
Journal ranks New Zealand as t he best in t he world f or
business f reedom. The Global Peace Index f or 2011
rat es t he count ry as t he most peacef ul in t he world.
The Brit ish colony of New Zealand became an
independent dominion in 1907. Tradit ionally, New
Zealand' s economy was built upon on a f ew primary
product s, not ably wool, meat , and dairy product s. It
was dependent on concessionary access t o Brit ish
market s unt il UK accession t o t he European Union.
Over t he last t wo decades, New Zealand has evolved
int o a more indust rialized, f ree market economy. It
compet es globally as an export - led nat ion t hrough
ef f icient port s, airline services, and submarine f iber-
opt ic communicat ions.
The New Zealand Exchange t races it s root s t o t he
Gold Rush of t he 1870s. In 1974, t he regional st ock
market s merged t o f orm t he New Zealand St ock
Exchange. In 2003, t he Exchange demut ualized, and
of f icially became t he New Zealand Exchange Limit ed.
The largest f irms t raded on t he exchange are Flet cher
Building and Telecom Corporat ion of New Zealand.



Capi t al market ret urns f or New Zeal and
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 533. 4 as compared t o 8. 8
f or bonds and 6. 3 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 3. 8% and bills by 4 . 1% per year. Figure 3 shows t hat
t he long- t erm real ret urn on New Zealand equit ies was an annualized
5. 8% as compared t o bonds and bills, which gave a real ret urn of 2 . 0%
and 1. 7% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
533
8.8
6.3
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
2.3
4.1
1.1
- 4.5
2.2
3.8
- 2.2
1.7
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.8
9.8
19.7
2.0
5.8
9.0
1.7
5.5
4.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_44


Norway
Nordic oil
kingdom
Norway is a very small count ry (ranked 115t h by
populat ion and 61st by land area) surrounded by large
nat ural resources t hat make it t he world’ s f ourt h- largest
oil export er and t he second- largest export er of f ish.
The populat ion of 4. 8 million enjoys t he second- largest
GDP per capit a in t he world and lives under a
const it ut ional monarchy out side t he Eurozone (a
dist inct ion shared wit h t he UK). The Unit ed Nat ions,
t hrough it s Human Development Index, ranks Norway
t he best count ry in t he world f or lif e expect ancy,
educat ion and st andard of living.
The Oslo st ock exchange (OSE) was f ounded as
Christ iania Bors in 1819 f or auct ioning ships,
commodit ies and currencies. Lat er, t his ext ended t o
t rading in st ocks and shares. The exchange now f orms
part of t he OMX grouping of Scandinavian exchanges.
In t he 1990s, t he Government est ablished it s pet roleum
f und t o invest t he surplus wealt h f rom oil revenues. This
has grown t o become t he largest f und in Europe and t he
second- largest in t he world, wit h a market value above
USD 0. 5 t rillion. The f und invest s predominant ly in
equit ies and, on average, it owns more t han one percent
of every list ed company in t he world.
The largest OSE st ocks are St at oil, DnB NOR, and
Telenor.



Capi t al market ret urns f or Norway
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 97. 2 as compared t o 6. 6
f or bonds and 3. 6 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 2. 5% and bills by 3 . 0% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Norwegian equit ies was an annualized
4. 2% as compared t o bonds and bills, which gave a real ret urn of 1 . 7%
and 1. 2% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
97
6.6
3.6
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
3.1
3.5
3.0 1.0
2.8
2.5
3.9
5.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
4.2
8.1
27.4
1.7
5.5
12.2
1.2
4.9
7.2
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_45


Sout h Af ri ca
Golden
opportunity
The discovery of diamonds at Kimberley in 1870 and t he
Wit wat ersrand gold rush of 1886 had a prof ound impact
on Sout h Af rica’ s subsequent hist ory. Today, Sout h
Af rica has 90% of t he world’ s plat inum, 80% of it s
manganese, 75% of it s chrome and 41% of it s gold, as
well as vit al deposit s of diamonds, vanadium and coal.
The 1886 gold rush led t o many mining and f inancing
companies opening up, and t o cat er f or t heir needs, t he
Johannesburg St ock Exchange (JSE) opened in 1887.
Over t he years since 1900, t he Sout h Af rican equit y
market has been one of t he world’ s most successf ul,
generat ing real equit y ret urns of 7. 3% per year, t he
second- highest ret urn among t he Yearbook count ries.
Today, Sout h Af rica is t he largest economy in Af rica,
wit h a sophist icat ed f inancial st ruct ure. Back in 1900,
Sout h Af rica, t oget her wit h several ot her Yearbook
count ries, would have been deemed an emerging
market . According t o index compilers, it has not yet
emerged, and it t oday ranks as t he f if t h- largest
emerging market .
Gold, once t he keyst one of Sout h Af rica’ s economy, has
declined in import ance as t he economy has diversif ied.
Resource st ocks, however, are well over a quart er of t he
JSE’ s market capit alizat ion. The largest JSE st ocks are
MTN, Sasol, and St andard Bank.



Capi t al market ret urns f or Sout h Af ri ca
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 2524. 6 as compared t o 7. 0
f or bonds and 3. 2 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 5. 5% and bills by 6 . 2% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Sout h Af rican equit ies was an annualized
7. 3% as compared t o bonds and bills, which gave a real ret urn of 1 . 8%
and 1. 0% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
2,525
7.0
3.2
0
1
10
100
1,000
10,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
5.8
6.5
6.2
1.5
6.9
5.5
3.9
7.8
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
7.3
12.6
22.6
1.8
6.8
10.4
1.0
6.0 6.2
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_46


Spai n
Key to Latin
America
Spanish is t he most widely spoken int ernat ional
language af t er English, and has t he f ourt h- largest
number of nat ive speakers af t er Chinese, Hindi and
English. Part ly f or t his reason, Spain has a visibilit y and
inf luence t hat ext ends way beyond it s Sout hern
European borders, and carries weight t hroughout Lat in
America.
The modern st yle of Spanish bullf ight ing is described as
daring and revolut ionary, and t hat is an apt descript ion
of real equit y ret urns over t he cent ury. While t he 1960s
and 1980s saw Spanish real equit y ret urns enjoying a
bull market and ranked second in t he world, t he 1930s
and 1970s saw t he very worst ret urns among our
count ries.
Though Spain st ayed on t he sidelines during t he t wo
world wars, Spanish st ocks lost much of t heir real value
over t he period of t he civil war during 1936–39, while
t he ret urn t o democracy in t he 1970s coincided wit h t he
quadrupling of oil prices, height ened by Spain’ s
dependence on import s f or 70% of it s energy needs.
The Madrid St ock Exchange was f ounded in 1831 and it
is now t he 15t h largest in t he world, helped by st rong
economic growt h since t he 1980s. The major Spanish
companies ret ain st rong presences in Lat in America
combined wit h increasing st rengt h in banking and
inf rast ruct ure across Europe. The largest st ocks are
Telef onica, Banco Sant ander, and BBVA.



Capi t al market ret urns f or Spai n
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 48. 7 as compared t o 4. 1
f or bonds and 1. 5 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 2. 3% and bills by 3 . 2% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Spanish equit ies was an annualized 3. 6 %
as compared t o bonds and bills, which gave a real ret urn of 1. 3 % and
0. 3% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
49
4.1
1.5
0
1
10
100
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
4.1
3.2
1.3
4.6
3.4
2.3
6.7
2.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
3.6
9.6
22.3
1.3
7.2
11.8
0.3
6.2
5.9
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_47


Sweden
Nobel prize
returns
Alf red Nobel bequeat hed 94% of his t ot al asset s t o
est ablish and endow t he f ive Nobel Prizes (f irst awarded
in 1901), inst ruct ing t hat t he capit al be invest ed in saf e
securit ies. Were Sweden t o win a Nobel prize f or it s
invest ment ret urns, it would be f or it s achievement as
t he only count ry t o have real ret urns f or equit ies, bonds
and bills all ranked in t he t op t hree.
Real Swedish equit y ret urns have been support ed by a
policy of neut ralit y t hrough t wo world wars, and t he
benef it s of resource wealt h and t he development , in t he
1980s, of indust rial holding companies. Overall, t hey
have ret urned 6. 3% per year, behind t he t wo highest -
ranked count ries, Aust ralia and Sout h Af rica.
The St ockholm st ock exchange was f ounded in 1863
and is t he primary securit ies exchange of t he Nordic
count ries. Since 1998, has been part of t he OMX
grouping. The largest SSE st ocks are Nordea Bank,
Ericsson, and Svenska Handelsbank.
Despit e t he high rankings f or real bond and bill ret urns,
current Nobel prize winners will rue t he inst ruct ion t o
invest in saf e securit ies as t he real ret urn on bonds was
only 2. 4% per year, and t hat on bills only 1. 9% per
year. Had t he capit al been invest ed in domest ic equit ies,
t he winners would have enjoyed immense f ort une as
well as f ame.



Capi t al market ret urns f or Sweden
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 903. 4 as compared t o 1 4. 6
f or bonds and 8. 1 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 3. 8% and bills by 4 . 3% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Swedish equit ies was an annualized 6. 3 %
as compared t o bonds and bills, which gave a real ret urn of 2. 4 % and
1. 9% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
903
14.6
8.1
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
6.1
4.3
0.3
3.1
4.8
3.8
6.9
2.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
6.3
10.1
22.9
2.4
6.1
12.4
1.9
5.5
6.8
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_48


Swi t zerl and
Traditional
safe haven
For a small count ry wit h just 0. 1% of t he world’ s
populat ion and 0. 008% of it s land mass, Swit zerland
punches well above it s weight f inancially and wins
several gold medals in t he global f inancial st akes. In t he
Global Compet it iveness Report 2010–2011, Swit zerland
is t op ranked in t he world.
The Swiss st ock market t races it s origins t o exchanges
in Geneva (1850), Zurich (1873) and Basel (1876). It is
now t he world’ s eight h- largest equit y market ,
account ing f or 3. 0% of t ot al world value.
Since 1900, Swiss equit ies have achieved a mid- ranking
real ret urn of 4. 2%, while Swit zerland has been one of
t he world’ s t hree best - perf orming government bond
market s, wit h an annualized real ret urn of 2. 1%.
Swit zerland has also enjoyed t he world’ s lowest inf lat ion
rat e: just 2. 3% per year since 1900. Meanwhile, t he
Swiss f ranc has been t he world’ s st rongest currency.
Swit zerland is, of course, one of t he world’ s most
import ant banking cent ers, and privat e banking has been
a major Swiss compet ence f or over 300 years. Swiss
neut ralit y, sound economic policy, low inf lat ion and a
st rong currency have all bolst ered t he count ry’ s
reput at ion as a saf e haven. Today, close t o 30% of all
cross- border privat e asset s invest ed worldwide are
managed in Swit zerland.
Swit zerland’ s list ed companies include world leaders
such as Nest le, Novart is and Roche.



Capi t al market ret urns f or Swi t zerl and
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 100. 0 as compared t o 1 0. 1
f or bonds and 2. 4 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 2. 1% and bills by 3 . 4% per year. Figure 3 shows t hat
t he long- t erm real ret urn on Swiss equit ies was an annualized 4. 2% as
compared t o bonds and bills, which gave a real ret urn of 2. 1 % and
0. 8% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
100
10.1
2.4
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 4.2
4.1
3.4
2.4 2.1 2.1
4.6
- 0.8
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
4.2
6.6
19.8
2.1
4.5
9.3
0.8 3.1
5.0
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_49


Uni t ed Ki ngdom
Global
center
Organized st ock t rading in t he UK dat es f rom 1698.
This most ly t ook place in Cit y of London cof f ee houses
unt il t he London St ock Exchange was f ormally
est ablished in 1801. By 1900, t he UK equit y market
was t he largest in t he world, and London was t he
world’ s leading f inancial cent er, specializing in global
and cross- border f inance.
Early in t he 20t h cent ury, t he US equit y market overt ook
t he UK, and nowadays, bot h New York and Tokyo are
larger t han London as f inancial cent ers. What cont inues
t o set London apart , and just if ies it s claim t o be t he
world’ s leading int ernat ional f inancial cent er, is t he
global, cross- border nat ure of much of it s business.
Today, London is ranked as t he t op f inancial cent re in
t he Global Financial Cent res Index, Worldwide Cent res
of Commerce Index, and Forbes’ ranking of powerf ul
cit ies. It is t he world’ s banking cent er, wit h 550
int ernat ional banks and 170 global securit ies f irms
having of f ices in London. The London f oreign exchange
market is t he largest in t he world, and London has t he
world’ s t hird- largest st ock market , t hird- largest
insurance market , and eight h- largest bond market .
London is t he world’ s largest f und management cent er,
managing almost half of Europe’ s inst it ut ional equit y
capit al, and t hree- quart ers of Europe’ s hedge f und
asset s. More t han t hree- quart ers of Eurobond deals are
originat ed and execut ed in London. More t han a t hird of
t he workld’ s swap t ransact ions and more t han a quart er
of global f oreign exchange t ransact ions t ake place in
London, which is also a major cent er f or commodit ies
t rading, shipping, and many ot her services.



Capi t al market ret urns f or t he Uni t ed Ki ngdom
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 317. 4 as compared t o 4. 6
f or bonds and 3. 1 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 3. 9% and bills by 4 . 3% per year. Figure 3 shows t hat
t he long- t erm real ret urn on UK equit ies was an annualized 5. 3 % as
compared t o bonds and bills, which gave a real ret urn of 1. 4 % and
1. 0% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
317
4.6
3.1
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
4.5
4.3
- 1.3
1.0
3.4
3.9
3.4
- 0.1
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.3
9.5
20.0
1.4
5.4
13.7
1.0
5.0
6.4
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_50


Uni t ed St at es
Financial
superpower
In t he 20t h cent ury, t he Unit ed St at es rapidly became
t he world’ s f oremost polit ical, milit ary, and economic
power. Af t er t he f all of communism, it became t he
world’ s sole superpower.
The USA is also a f inancial superpower. It has t he
world’ s largest economy, and t he dollar is t he world’ s
reserve currency. It s st ock market account s f or 41% of
t ot al world value, which is over f ive t imes as large as
Japan, it s closest rival. The USA also has t he world’ s
largest bond market .
US f inancial market s are also t he best document ed in
t he world and, unt il recent ly, most of t he long- run
evidence cit ed on hist orical asset ret urns drew almost
exclusively on t he US experience. Since 1900, US
equit ies and US bonds have given real ret urns of 6. 3%
and 1. 8%, respect ively.
There is an obvious danger of placing t oo much reliance
on t he excellent long run past perf ormance of US
st ocks. The New York St ock Exchange t races it s origins
back t o 1792. At t hat t ime, t he Dut ch and UK st ock
market s were already nearly 200 and 100 years old,
respect ively. Thus, in just a lit t le over 200 years, t he
USA has gone f rom zero t o a 41% share of t he world’ s
equit y market s.
Ext rapolat ing f rom such a successf ul market can lead t o
“success” bias. Invest ors can gain a misleading view of
equit y ret urns elsewhere, or of f ut ure equit y ret urns f or
t he USA it self . That is why t his Yearbook f ocuses on
global ret urns, rat her t han just t hose f rom t he USA.



Capi t al market ret urns f or t he Uni t ed St at es
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 850. 7 as compared t o 7. 5
f or bonds and 2. 9 f or bills. Figure 2 shows t hat , since 19 00, equit ies
beat bonds by 4. 4% and bills by 5 . 3% per year. Figure 3 shows t hat
t he long- t erm real ret urn on US equit ies was an annualized 6. 3 % as
compared t o bonds and bills, which gave a real ret urn of 1. 8 % and
1. 0% respect ively. For addit ional explanat ions of t hese f igures, see
page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
851
7.5
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 3.9
4.4
5.3
0.9
2.6
4.4
5.5
0.3
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
6.3
9.4
20.3
1.8
4.8
10.2
1.0 3.9 4.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_51


Worl d
Globally
diversified
It is int erest ing t o see how t he 19 Yearbook count ries
have perf ormed in aggregat e over t he long run. We have
t heref ore creat ed a 19- count ry world equit y index
denominat ed in a common currency, in which each
count ry is weight ed by it s st art ing- year equit y market
capit alizat ion, or in years bef ore capit alizat ions were
available, by it s GDP. We also comput e a 19- count ry
world bond index, wit h each count ry weight ed by GDP.
These indexes represent t he long- run ret urns on a
globally diversif ied port f olio f rom t he perspect ive of an
invest or in a given count ry. The chart s opposit e show
t he ret urns f or a US global invest or. The world indexes
are expressed in US dollars; real ret urns are measured
relat ive t o US inf lat ion; and t he equit y premium versus
bills is measured relat ive t o US t reasury bills.
Over t he 111 years f rom 1900 t o 2011, Figure 1 shows
t hat t he real ret urn on t he world index was 5. 5% per
year f or equit ies, and 1. 6% per year f or bonds. It also
shows t hat t he world equit y index had a volat ilit y of
17. 7% per year. This compares wit h 23. 4% per year f or
t he average count ry and 20. 3% per year f or t he USA.
The risk reduct ion achieved t hrough global diversif icat ion
remains one of t he last “f ree lunches” available t o
invest ors.



Capi t al market ret urns f or Worl d (i n USD)
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 374. 8 as compared t o 6. 1
f or bonds and 2. 9 f or US bills. Figure 2 shows t hat , since 1 900,
equit ies beat bonds by 3. 8% and US bills by 4. 5 % per year. Figure 3
shows t hat t he long- t erm real ret urn on World equit ies was an
annualized 5. 5% as compared t o bonds and US bills, which gave a real
ret urn of 1. 6% and 1. 0% respect ively. For addit ional explanat ions of
t hese f igures, see page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
375
6.1
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
- 4.0
4.0
4.5
- 0.8
1.2
3.8
4.5
1.5
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.5
8.6
17.7
1.6
4.7
10.4
1.0 3.9 4.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_52


Worl d ex-US
Rest of the
world
In addit ion t o t he t wo world indexes, we also const ruct
t wo world indexes t hat exclude t he USA, using exact ly
t he same principles. Alt hough we are excluding just one
out of 19 count ries, t he USA account s f or roughly half
t he t ot al equit y market capit alizat ion of our 19 count ries,
so t he 18- count ry world ex- US equit y index represent s
approximat ely half t he t ot al value of t he world index.
We not ed above t hat , unt il recent ly, most of t he long-
run evidence cit ed on hist orical asset ret urns drew
almost exclusively on t he US experience. We argued
t hat f ocusing on such a successf ul economy can lead t o
“success” bias. Invest ors can gain a misleading view of
equit y ret urns elsewhere, or of f ut ure equit y ret urns f or
t he USA it self .
The chart s opposit e conf irm t his concern. They show
t hat , f rom t he perspect ive of a US- based int ernat ional
invest or, t he real ret urn on t he world ex- US equit y index
was 5. 0% per year, which is 1. 3% per year below t hat
f or t he USA. This suggest s t hat , alt hough t he USA has
not been a massive out lier, it is nevert heless import ant
t o look at global ret urns, rat her t han just f ocusing on t he
USA.



Capi t al market ret urns f or Worl d ex-US (i n USD)
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 234. 7 as compared t o 3. 8
f or bonds and 2. 9 f or US bills. Figure 2 shows t hat , since 1 900,
equit ies beat bonds by 3. 8% and US bills by 4. 0 % per year. Figure 3
shows t hat t he long- t erm real ret urn on World ex- US equit ies was an
annualized 5. 0% as compared t o bonds and US bills, which gave a real
ret urn of 1. 2% and 1. 0% respect ively. For addit ional explanat ions of
t hese f igures, see page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
235
3.8
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
4.1 4.0
- 3.2
- 1.5
0.5
3.8
4.2
2.9
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
5.0
8.2
20.4
1.2
4.2
14.2
1.0 3.9 4.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 Count r y pr of i l es_53


Europe
The Old
World
The Yearbook document s invest ment ret urns f or 13
European count ries. They comprise eight euro currency
area st at es (Belgium, Finland, France, Germany,
Ireland, It aly, t he Net herlands and Spain) and f ive
European market s t hat are out side t he euro area
(Denmark, Sweden and t he UK; and f rom out side t he
EU, Norway and Swit zerland). Loosely, we might argue
t hat t hese 13 count ries represent t he Old World.
It is int erest ing t o assess how well European count ries
as a group have perf ormed, compared wit h our world
index. We have t heref ore const ruct ed a 13- count ry
European index using t he same met hodology as f or t he
world index. As wit h t he world index, t his European
index can be designat ed in any desired common
currency. For consist ency, t he f igures opposit e are in
US dollars f rom t he perspect ive of a US int ernat ional
invest or.
Figure 1 opposit e shows t hat t he real equit y ret urn on
European equit ies was 4. 8%. This compares wit h 5. 5%
f or t he world index, indicat ing t hat t he Old World
count ries have underperf ormed. This may relat e t o t he
dest ruct ion f rom t he t wo world wars, where Europe was
at t he epicent er; or t o t he f act t hat many of t he New
World count ries were resource- rich; or perhaps t o t he
great er vibrancy of New World economies.



Capi t al market ret urns f or Europe (i n USD)
Figure 1 shows t hat , over t he last 111 years, t he real value of equit ies,
wit h income reinvest ed, grew by a f act or of 175. 3 as compared t o 2. 5
f or bonds and 2. 9 f or US bills. Figure 2 shows t hat , since 1 900,
equit ies beat bonds by 3. 9% and US bills by 3. 8 % per year. Figure 3
shows t hat t he long- t erm real ret urn on European equit ies was an
annualized 4. 8% as compared t o bonds and US bills, which gave a real
ret urn of 0. 8% and 1. 0% respect ively. For addit ional explanat ions of
t hese f igures, see page 31.
Fi gur e 1
Annual i zed perf ormance f rom 1900 t o 2010
175
2.5
2.9
0
1
10
100
1,000
1900 10 20 30 40 50 60 70 80 90 2000 10
Equities Bonds US Bills
Fi gur e 2
Equi t y ri sk premi um over 10 t o 111 years
4.5
3.8
- 3.9
0.5
1.2
3.9
6.2
2.5
- 10
- 5
0
5
10
2001–2010 1986–2010 1961–2010 1900–2010
Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)
Fi gur e 3
Ret urns and ri sk of maj or asset cl asses si nce 1900
4.8
7.9
21.5
0.8 3.8
15.3
1.0 3.9 4.7
- 5
0
5
10
15
20
25
Real return (%) Nominal return (%) Standard deviation
Equities Bonds US Bills

Source: Elroy Dimson, Paul Marsh and Mi ke St aunt on, Credit Suisse Global Invest ment
Ret urns Sourcebook 2 0 1 1 .

CREDIT SUISSE GL OBAL INVESTMENT RETURNS YEARBOOK 2 0 1 1 _54

Elroy Dimson
Elroy Dimson is Emeritus Professor of Finance at London
Business School, where he has been a Governor, Chair of the
Finance and Accounting areas, and Dean of the MBA and
EMBA programs. He chairs the Strategy Council of the
Norwegian Government Pension Fund – Global, and is a
member of the investment committees of Guy’ s & St Thomas’
Charity, London University, and UnLtd – The Foundation for
Social Entrepreneurs. He is a Director and Past President of
the European Finance Association and is an elected member of
the Financial Economists Roundtable. He has been appointed
to Honorary Fellowships of Cambridge Judge Business School,
the Society of Investment Professionals, and the Institute of
Actuaries. He has published articles in Journal of Business,
Journal of Finance, Journal of Financial Economics, Journal of
Portfolio Management, Financial Analysts Journal, and other
journals. His PhD in Finance is from London Business School.
Paul Marsh
Paul Marsh is Emeritus Professor of Finance at London
Business School. Within London Business School he has been
Chair of the Finance area, Deputy Principal, Faculty Dean, an
elected Governor and Dean of the Finance Programmes,
including the Masters in Finance. He has advised on several
public enquiries; is currently Chairman of Aberforth Smaller
Companies Trust; was previously a non- executive director of
M&G Group and Majedie Investments; and has acted as a
consultant to a wide range of financial institutions and
companies. Dr Marsh has published articles in Journal of
Business, Journal of Finance, Journal of Financial Economics,
Journal of Portfolio Management, Harvard Business Review,
and other journals. With Elroy Dimson, he co- designed the
FTSE 100- Share Index and the RBS Hoare Govett Smaller
Companies Index, produced since 1987 at London Business
School. His PhD in Finance is from London Business School.
Mike Staunton
Mike Staunton is Director of the London Share Price Database,
a research resource of London Business School, where he
produces the London Business School Risk Measurement
Service. He has taught at universities in the United Kingdom,
Hong Kong and Switzerland. Dr Staunton is co- author with
Mary Jackson of Advanced Modelling in Finance Using Excel
and VBA, published by Wiley and writes a regular column f or
Wilmott magazine. He has had articles published in Journal of
Banking & Finance, Financial Analysts Journal, and Journal of
the Operations Research Society. With Elroy Dimson and Paul
Marsh, he co- authored the influential investment book Triumph
of the Optimists, published by Princeton University Press, which
underpins this Yearbook and the accompanying Credit Suisse
Global Investment Returns Sourcebook 2011. His PhD in
Finance is from London Business School.

David Holland
David Holland is a Senior Advisor to Credit Suisse. He was
previously co- Head of HOLT Valuation & Analytics, the
research and development arm of HOLT. He was responsible
for improvements to the HOLT CFROI® framework, the
development of custom solutions and investment products, and
the generation of HOLT content. Mr Holland joined Credit
Suisse First Boston in May 2002 from Fractal Value Advisors, a
corporate strategy and valuation advisory business he owned in
South Africa. He has worked with the world’ s leading fund
management firms on designing investment decision processes;
advised corporations and private equity firms on strategy and
valuation; and counselled the South African Reserve Bank on
market expectations. He co- authored the book Beyond
Earnings: A User’ s Guide to Excess Return Models and the
HOLT CFROI® Framework with Tom Larsen, published by
Wiley Finance. Mr Holland holds degrees in Chemical
Engineering from the University of Illinois (BS) and Stanford
University (MS), and an MBA at the University of Cape Town.
Bryant Matthews
Bryant Matthews is the Director of Research at Credit Suisse,
HOLT Division. He joined Credit Suisse in January 2002 when
the firm acquired HOLT Value Associates LP. He has acted as
consultant for various banks and professional bodies in the field
of finance, and designed numerous valuation frameworks for
Institutional Investors. Research conducted by Mr Matthews and
his team has resulted in many significant insights into
understanding the link between corporate performance and
stock price. Areas of recent investigation include empirical
research on corporate fade dynamics, estimating discount rates
through a market derived approach, and the development of risk
models useful in understanding how risk evolves over time. Mr
Matthews is an MBA graduate of Northwestern Kellogg
Graduate School of Management.

About the authors
Genera| d|sc|a|mer / Important |nformat|on
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Ross How|¦¦
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Authors
E|roy D|mson, London Bus|noss Schoo|, od|mson¿|ondon.odu
Puu| Mursh, London Bus|noss Schoo|, pmursh¿|ondon.odu
M|ko S¦uun¦on, London Bus|noss Schoo|, ms¦uun¦on¿|ondon.odu
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7 Fobruury 20!!
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Junuury 20!!
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The key to growth
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Part 1
Junuury 20!0

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 5

Fear of falling
After a decade with two savage bear markets, investors are wary of equities. Government bonds have been a bright spot, but capital values could fall. This article examines how far government bonds can decline, investigates the role of bonds as a diversifier, shows how the crucial stock-bond correlation has changed over time, and compares the performance of corporate, long- and midmaturity government bonds, and Treasury bills. A global study of government bonds reveals the pain and potential reward from exposure to inflation risk.

Elroy Dimson, Paul Marsh and Mike Staunton, London Business School

Over the long haul, equities have beaten inflation, they have beaten treasury bills, and they have beaten bonds. And as we show in this Credit Suisse Global Investment Returns Yearbook, the same pattern has been repeated in every market for which we have long-term data. With 111 years of returns for 19 Yearbook countries, representing almost 90% of global stock market value, we can be confident of the historical superiority of equities. In the USA, for example, equities gave an annualized total return over the 111 years of 6.3% in real terms, far ahead of the 1.8% real return on government bonds Yet that superiority has been dented by the striking performance of bonds over intervals that exceed the investment horizon of most individuals and institutions. Looking back from 2011, bond investors have enjoyed several decades of outstanding performance. The Credit Suisse Global Investment Returns Sourcebook is the companion volume to this Yearbook. The Sourcebook reports that for the USA, over the period from the start of 1980 to the end of 2010, the annualized real (inflation adjusted) return on government bonds was 6.0%, broadly matching the 6.3% long-term performance of equities. Over the preceding 80

years, US government bonds had provided an annualized real return of only 0.2%. Similarly, for the UK, from 1980 to 2010 the annualized real return on government bonds was 6.3%. Over the preceding 80 years, UK government bonds had provided an annualized real return of just –0.5%. While equities have disappointed in recent times, bonds have exceeded most investors’ expectations. Bonds – the lower risk asset – have met or exceeded the performance of risky equities. After such a good run, investors are wary that bond prices could fall. In this article, we therefore examine the extent to which bonds expose investors to potentially large drawdowns on their portfolios. We examine the correlation between stocks and bonds, which underpins the role of bonds in a balanced portfolio. Finally, with inflationary concerns in the ascendancy, we examine the impact of both unexpected and expected inflation on real bond returns. Risk and return For each of our 19 countries, we plot the realized equity risk premium, relative to government bonds, over the entire Yearbook history and for the sub-

equities underperformed bonds. is an ailment that often afflicts investors. Investor basophobia Basophobia. are in real (inflation adjusted) terms. Using daily data from 1900 to date. stock prices collapsed until. From January 1973. and Mike Staunton. or fear of falling. and in real terms by 56%. equities were superior to bonds in only four countries – Figure 1 Equity risk premium versus to bonds. we look first at drawdowns for US equities.2% per year. they did not recover until February 1945. For 15 of the 19 countries. Paul Marsh. The drawdown is defined as the difference between the portfolio’s value on a particular date and its high-water mark. sets more recent setbacks in context. and that bonds have a continuing attraction for investors. equities performed better than bonds. although equities have provided a higher return than bonds. three of which were resource rich economies. they can experience deeper drawdowns – yet there have also been long intervals of deep bond drawdowns. Equity investors have suffered large extremes of performance.2 3. Triumph of the Optimists. the realized equity risk premium versus bonds over 2000–10 was –3. and the blue bars are all positive with an average premium of 3. This raises the question of how large the losses can be from equities and from bonds. They are concerned about buying at the top. The interval from the date of the high-water mark to breaching the high-water mark again is the recovery period. The investment is said to be underwater from the date of the high-water mark to the end of the recovery period. however. the equity index was down in nominal terms by 48%. by October 1974. This indicates just how bad an investor’s experience might have been if the investor had the misfortune to buy at the top of a bull market. A crucial question is how deep portfolio drawdowns can be. After the tech-bubble burst in March 2000. real terms 1900–2010 Source: Elroy Dimson. and Mike Staunton. the historical record of which is shown in Figure 2 in blue.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 6 period since 2000.8 Figure 2 Drawdown on US equities and bonds. unless stated to the contrary. Over the very long term. and that investors should be concerned about the possibility of capital losses. An alternative view is that bonds have become expensive. government bonds have so far tended to be the asset of choice in the 21st century. authors’ updates 0% -10% -20% -30% -40% -50% -60% -70% -80% 1900 Bonds 10 Equities 20 30 40 50 60 70 80 90 2000 10 . we show the annualized risk premia that were realized over the 11 years from the start of 2000 to the end of 2010 – every red bar being smaller than the long-term premium in blue. One interpretation of this outcome is that the reward for equity investing has disappeared. 1900–2010 and 2000–10 Source: Elroy Dimson. It took only 26 months to recover the nominal high. In red. In blue. in real terms equities were underwater until April 1983. All returns include reinvested dividends and. we show the annualized equity risk premia that were achieved over the last 111 years. As is apparent in the country profiles (see page 31). authors’ updates. and then experiencing a dramatic fall in the value of their purchase. US stocks fell to a trough in July 1932 that was in real terms 79% below the September 1929 peak. equity prices also col- Annualized excess return of equities vs bonds (%) 6 4 2 0 -2 -4 -6 -8 SAf Nor Aus Den Spa NZ Can Swe UK Avg Swi Bel Ire Ger US Fra Ita Jap Net Fin 1900–2010 2000–10 -3. relative to a portfolio’s running maximum value or high-water mark. As we shall see. Germany excludes 1922–23. One way to express this is to measure the drawdown in value. On average.8% per annum. Triumph of the Optimists. Paul Marsh. we compute the cumulative percentage decline in real value from an index high to successive subsequent dates. This deep drawdown and long recovery period. and how long it takes to recover from them. To answer this question. But from the start of the new century. These premia are depicted in Figure 1. After the Wall Street Crash.

Paul Marsh. the recovery took from September 1981 to September 1991. the recovery took until April 1946. decline in real bond values until June 1920 by which date the real bond value had declined by 51%. But how well do bonds protect an investor’s wealth? In Figures 2 and 3. but UK equities entered 1975 down from that peak by 74% in real terms. upper panel) and UK (in red. British stock market experience. Historically. to some. But this was still more than twice as much as those who endured the 1929 Crash. real terms 1930–2010 Source: Elroy Dimson. After October 1936. After June 2007. there was an initially slow. and recovery took till February 1983. and Mike Staunton. while severe. Paul Marsh. However. they are still underwater. in real terms. the real equity index was down in nominal terms by 48%.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 7 lapsed and. But in October 1946. the UK suffered greater extremes of poor stock market performance. in real terms. The techcrash in March 2003 generated a real loss of 49%. though recovery was complete by October 1945. like a superior alternative. the approach and arrival of war led to a real stock market decline of 59% by June 1940. it can take a long time for recovery in real terms – even ignoring costs and taxes. and equity portfolios were less underwater. was similar. investors were left with between 44% and 48% of their peak-level real wealth. The first bond bear market started in January 1935. bonds began to slide again in real terms. real equity values fell by 56%. during the 2007–09 financial crisis. and by September 1939 the real value of bonds had fallen by 33%. these charts are devastating. While bonds appeared less risky in nominal terms. Recent setbacks in the USA. lasted for over 50 years. there were two major bear periods. which started from a peak on December 1940. Triumph of the Optimists. authors’ updates 0% -10% -20% -30% -40% -50% -60% -70% -80% 1930 Bonds 40 Equities 50 60 70 80 90 2000 10 Figure 4 Drawdown on 50:50 stock-bond blend. Before the oil crisis. 2000–02 and 2007–09. were not on the scale of the 1930s. UK government bonds were underwater. it is clear that their real value can be destroyed by inflation. followed by a decline in real value of 67%. Bond drawdowns The scope for deep and protracted losses from stocks makes fixed-income investing look. and Mike Staunton. The drawdown is plotted for both the USA (in blue. In the US bond market. Balanced portfolios Figure 4 presents the drawdown on an illustrative balanced portfolio of 50% equities and 50% bonds. by October 2002. lower Figure 3 Drawdown on UK equities and bonds. bonds remained underwater in real terms until August 1927. Following a peak in August 1915. we plot in red the corresponding drawdowns for government bonds. After the meltdowns of 1973–74. The UK had a similar experience. bond market drawdowns have been larger and/or longer than for equities. Compared to the USA. in real terms the market remains underwater to this day. the financial crisis hit the UK hard. That episode was dwarfed by the next bear market. and they have not yet fully recovered. and then accelerating. our daily data for the UK starts in 1930. shown in Figure 3 in blue. For those who are seeking safety of real returns. Whereas we have daily data starting in 1900 for the USA. While the nominal recovery took only 47 months. Similarly. and in real terms by 52%. and by March 2009 equities were down by 47% in real terms. authors’ updates 0% -10% -20% -30% -40% -50% 0% -10% -20% -30% -40% -50% -60% 1900 US blen d 10 20 30 40 50 60 70 80 90 2000 10 UK b le nd . Triumph of the Optimists. the equity market had hit a high in August 1972. having lost 73% of their value by December 1974. The US bond market’s drawdown. real terms 1900–2010 Source: Elroy Dimson. which was recovered by October 2006. for 47 years until December 1993.

In the UK.1% in the UK. Paul Marsh. 50:50 blend portfolio returned an annualized 4. Paul Marsh.7% in the US and 14. The stock-bond correlations as at end-2010 are negative: for the USA a correlation of –0.2 0.19 with a range of –0. from 1930). However.0 -0. bonds are less volatile than equities. Meanwhile. when bonds became a desirable safe-haven asset. But. There is nothing special about a 50:50 asset mix and. this example serves to highlight the risk-reducing potential of a balanced portfolio of bonds and stocks. Credit Suisse Global Investment Returns Sourcebook 2011. Second.14. and for the UK –0. we display rolling 60-month stockbond correlations averaged across the Yearbook’s 19 countries.2% in the USA and 13.3% (6.5% in the US (4. the stockbond correlation has been positive. In the USA.74 (in December 1939). equities and bonds have on several occasions lost more than 70% in real terms. in reality. bonds have had a lower standard deviation (averaging 12. starting in 1989 for most countries. In Figure 6. For the blend portfolio. They are denominated in local currency and adjusted by local inflation.1% in the UK.6 0. bonds are imperfectly correlated with stocks. it averaged +0. and authors’ extensions.0% in the UK. The indices are the MSCI equity and Citigroup WGBI bond indices (except South Africa for which we use swap rates). from 1930).CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 8 panel).4 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 United States United Kingdom Figure 6 Global average of rolling stock-bond correlations Source: Elroy Dimson.2 0. over the very long term. But since 1900.4 0. Since 1900. US government bonds had a real return of 1.31 (in May 2007) to +0. Bonds as a diversifier Why is the downside risk of the blended stock/ bond portfolio lower? There are two reasons. The key 0. this 50:50 blend has never (USA) or virtually never (UK) suffered a decline of over 50%. MSCI and Citigroup.03. Measured in local currency adjusted for inflation.67 (in October 1924). using real returns over the period 1930–2010. The country profiles (page 31 onwards) show that in all 22 Yearbook markets. and Mike Staunton. using real returns over the period 1900–2010. Figure 6 provides clear confirmation that the US and UK pattern of relatively low stock-bond correlations after the 1990s was prevalent worldwide.8% (2. changes in inflation expectations drove both stock and bond markets in tandem. in the turmoil of the 2000s.38 (in January 1960) to +0.31 with a range of –0. 1900–2010 Source: Elroy Dimson.4 0. although fairly low. the correlation became strongly negative in both countries.0 -0. the standard deviation was attractively low: 11. it has also had a lower volatility.4 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 . Furthermore. Antti Ilmanen 0. Stock-bond correlations were briefly negative around the 1929 Crash and for a longer period in the late 1950s and early 1960s. While a 50:50 equity/bond blend has had a lower expected return than an all-equity portfolio. The Figure 5 Rolling stock-bond correlations: real terms.3% in the USA and 20.4% in the UK. the duration of drawdowns is briefer for the blend portfolio than for the supposedly low-risk fixed income asset.5% across our 19 countries) than equities (which average 23. The correlations are shown for both the USA and UK. from the 1970s to the 1990s.4%). and Mike Staunton. investors should diversify across more assets than just local stocks and bonds. it averaged +0. the long-term annualized real return on US equities was 6.4% in the UK. Figure 5 plots the correlation between stock and bond returns computed in real terms over a rolling window of 60 months. When inflation accelerated and subsided. from 1930). In contrast to recent experience.7% in the UK.2 -0. as compared to bonds which has a standard deviation of 10. the standard deviation of real equity returns has been 20. First. Individually.2 -0.

an investment of USD 1 in 1900 in a long bond index. We also show the real return from investing in mid-maturity US government bonds. which grew in real value from USD 1 to USD 15.19 over the period starting in 1950.5. More details on long-term returns for the UK are provided in the Credit Suisse Global Investment Returns Sourcebook.6. we show the performance of corporate bonds. and Mike Staunton Triumph of the Optimists. 1900–2010 Source: Elroy Dimson. For every country.4 .9 12 8 7. A comparable investment in US government Treasury bills – which typically have a very short-term maturity of around one month – grew to a real value of USD 2. Global Financial Data 15.4 -0.0%. grew by the end of 2010 to a real value of USD 7. we can read the tea leaves of history.19 0. investment in this long bond index of GBP 1 grew by the end of 2010 to a real value of GBP 4. the correlation estimated over the recent period 2006–10 is lower than the average of the correlations estimated over the longer intervals of 1900– 2010 and 1950–2010. Paul Marsh.0% per year Corporate bonds 2. the average of all 19 countries’ monthly stock-bond correlations in Figure 7 is –0. they will still be low.1. investors would have ended up with almost as much from holding mid-maturity as from long-maturity bonds. MSC data.0%. Over the 85-year period from 1926 to 2010. We therefore examine how stock-bond correlations behaved over the very long term in all 19 Yearbook countries. Since this mid-maturity bond index starts in 1926. authors’ updates. and thereafter by a portfolio of dated bonds with an average maturity of 20 years. an annualized real return of 1. 1900–2010 Source: Elroy Dimson. But even if correlations rise towards the long-term averages depicted in Figure 7. In the USA. Antti Ilmanen 0.5% per year . Consistent with the last observation at the right of Figure 6. Our aim is to see whether the relatively low correlations we have found for the US and UK – and for other countries more recently – have been repeated elsewhere.4%. Finally.9 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Long-maturity bonds 1. We measure their performance by UK government 2½% consols until 1954. A comparable investment in Treasury bills grew to a real value of GBP 3. we have set its initial value equal to the then value of the long-maturity bond index.8% per year Mid-maturity bonds 1. The pattern of UK long bond returns is similar.0 -0. an annualized real return of 1. They are generally positive.19. we also display stock-bond correlations based on returns over 60 months to the end of 2010.19 -0.8%.24 over the entire period starting in 1900. Paul Marsh. and also for the years from 1950 to 2010. The maturity premium Over the horizon spanned by the Yearbook.7% per year Treasury bills 1. We therefore compute stock-bond correlations for all 19 Yearbook countries. In both the USA and the UK.9. the history of bond investment was not a tale of steady proFigure 7 Stock-bond correlations: Various time horizons. These long-term real returns on US bonds and bills are portrayed in Figure 8. based on annual real returns for the entire 111 years from 1900. longmaturity government bonds provided a superior return compared to holding Treasury bills. with an average of +0. an annualized real return of 2. Starting in 1900.2 .CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 9 question is this: Will low correlations persist into the future? While we cannot predict the future. With a low correlation to equities. representing the returns on government bonds with an approximate maturity of 20 years. an annualized real return of 1.6 Nor Aus Ger Jap Fra Net Den Fin Can Swe US Avg Swi NZ Bel UK Ire SAf Ita Spa 1900–2010 1950–2010 Monthly 2006–10 Figure 8 Cumulative real return from US bonds. Morningstar /Ibbotson Associates. bonds offer diversification opportunities. and +0. In Figure 7.5%.5 6. and Mike Staunton.24 0. with an average maturity of five years.8 4 2. These correlations are shown in Figure 7.2 -.9. equivalent to an annualized real return of 1.

since bond prices rose. there is considerable variation across countries.6%. minimum lending. the 144% real return on the world bond index was equivalent to 11. There were also two strong bull phases.a. the second of which was especially lengthy. the world bond index rose by a real 94% (14. the world bond index lost 39% of its real value. minimum lending rate. 0 -39 (Ger: –75%) -49 (Jap: –99%) -50 -95 -84 -100 '26–33 Wo rld -100 '1 8 '39–48 4–1 Wo rld Wo rld '22–23 '43–47 '45–48 '72–74 Ger Ita Fra UK '82–86 Wo rld '82–2008 Wo rld Figure 10 Short-term nominal interest rates in the UK. offset by interludes with excellent performance. in reality. minimum band 1 dealing rate. 144 100 1 . over 1982– 2008. The first bull market was one in which real bond returns were underpinned by the deflation of the 1930s. 1900–2010 Source: Elroy Dimson. For these countries.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 10 gress.8% per year. During World War I.2% p. Finland.a.7% per year). while World War II and its aftermath were accompanied by a 49% decline in real terms. minimum band 1. repo and official bank rates from Bank of England % 14 12 10 8 6 4 2 0 1694 1750 1800 1850 1900 1950 2010 . deflation has been good news for bond investors: during the deflationary period 1926–33. We have discussed long-maturity government bonds in the US and UK. Though wars are bad. As we show in the chart. This graph plots the level of the short-term interest rate in the UK. Although bonds have been less volatile than equities. the decline in interest rates has been good in retrospect. Paul Marsh. The worst periods for bond investors were episodes of exceptionally high inflation. repo rate and official bank rate. These high returns have arisen from a remarkable decline in interest rates since the inflationary 1970s. but even in the 19th. Credit Suisse Global Investment Returns Sourcebook 2011 World wars Deflation Inflation and hyperinflation Beating inflation Golden era 649 200 7. bonds have therefore sometimes experienced prolonged periods of remaining underwater.2% per year) and. there were two bear markets. There have consequently been lengthy periods when bond performance lagged behind inflation. For bond investors. 94 1 4. As described earlier. we can be completely sure that realized returns fell short of investors’ expectations. During 1982–86. and in real terms. it gave a real return of 649% (7. Interest rates and inflation The extent to which interest rates have fallen is highlighted in Figure 10. and Mike Staunton. borrowers frequently face loan limits and pay significant credit spreads). as experienced in Germany (1922–23). Six countries – Belgium. While the USA and UK are broadly in line with global financial history. For our world bond index. US and UK government bonds were below their high-water mark from about half a century. and the UK (1972–74). Italy and Japan – had real bond returns over the last 111 years that were negative. the annualized real (USD) return was 1. 18th and 17th centuries. As we showed in the drawdown charts. the two world wars were generally periods of poor performance for bond investors. Germany. nominal interest rates have never been as low in the UK as today – not only during the 21st and 20th centuries.0%. Italy and France (1940s). the Country Profiles show that the annualized real bond return in the 19 countries averaged 1. they have been hampered by lower average long-run rates of return. linking together data for the bank rate. As Figure 9 indicates.8% 1 p.7% p. but what about worldwide evidence? Figure 9 Global bond performance In the second half of this Yearbook. But that means they are Extreme real returns in bond market history. while the second was underpinned by gradual success in conquering the inflationary pressures of the 1970s. These low interest rates ought to be good news for borrowers (though.a. France. 1694–2010 Source: Bank. Figure 9 depicts some of these episodes of extreme bond market performance.

expected bond returns are higher. except for countries where credit risk is a concern.9 8 8. 1900–2010 Source: Elroy Dimson. Second.0 4 3. there is reduced scope for return enhancement through further cuts in interest rates or unconventional measures such as quantitative easing. then bonds will be perceived as riskier.5 7.1 . In recent months. The countries with the lowest inflation performed best.8 1 0. bond prices will therefore fall because future cash flows decline in real terms. and Mike Staunton. And third. But price falls are likely to be greater than can be explained just from the impact of higher expected inflation on the real cash flows from bonds. not only in nominal terms. we have already seen a move in this direction. data (see Figure 7).6 -0. when inflation is higher it is typically more volatile.2 2 0. Paul Marsh. while this enables us to quantify the impact of inflation on real bond values. They are the only asset class that provides a hedge against deflation and they are a safe haven during stock market crises. increasing the stock-bond correlation and reducing the diversification benefits from bonds. while bonds in high-inflation countries underperformed.8 7. 10 1 0. Yet. yields and expected returns will increase. At each New Year. We confirm this in Figure 11. and the required premium for exposure to inflation uncertainty will rise. at the same time. during a period when consumer prices fall. The leftmost bars in Figure 11 show the annualized real returns from quintiles 1. while the real yield increases. stock-bond correlations have been lower than correlations based on long-term. they were re-priced to offer a smaller forward-looking risk premium. Inflation reduces bonds’ safe-haven status When higher inflation is a threat. This pattern was evident over all Figure 11 Real returns: ranking by concurrent inflation. there are opportunities to increase expected returns. We assign the 19 Yearbook countries to quintiles that comprise four countries (three for the middle quintile). with a positive term premium. Meanwhile. Income is reinvested. Triumph of the Optimists. Also. The real yield is also likely to rise because of three intertwined factors. they can be expected to deliver low but positive performance in the years ahead. Looking to the future. increase their beta relative to equities. So when deflation is a concern.3 -2. Yields declined. Conversely. Figure 11 reports returns in real USD. Today’s yields on sovereign bonds are small.4 5. since the forward-looking return from fixed income securities is now low. bonds have favorable investment characteristics.9 3. countries are re-ranked and portfolios rebalanced.or negative-beta asset should reflect its riskreducing attributes. government bonds come into their own. when the purchasing power derived from a fixed-interest investment is uncertain.a.7 -2. as we have seen. as inflationary concerns have moved into the ascendancy. since year-ahead inflation is not known in advance. authors’ updates % p. as the beta of government bonds fell during the 1990s and into the 2000s. Note that.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 11 poorer in prospect. Inflation risk When inflation accelerates. Here. although only by exposing portfolios to corporate or sovereign default risk. The yield curve can be expected to slope upwards so as to provide long-bond investors. regardless of maturity or geography. First. if bonds retain their safehaven attributes. we have shown that over recent periods. The rise in real yields is needed to increase the forwardlooking real return to a level that attracts investors to hold these securities. and realized returns were therefore high. countries are ranked by the annual inflation they will experience over the year ahead. Consequently. it is not an implementable strategy. The expected return for a low.4 2. who predominately care about real returns. as longer bonds face greater inflation uncertainty. bond yields will obviously rise and prices will fall. and at the end of each year. bonds are more likely to be a hedge against the equity market (see Figures 5 and 6). it loses some of its attraction as a refuge from financial market volatility. 3 and 5 over the full 111 year period. higher and uncertain inflation reappears. Consistent with this story. and prices will fall. If.6 2. These pressures limit the safe-haven attribute of bonds and.4 1950– 1974 1975–1999 2000–2010 -2 1900–2010 1900–1924 1925– 1949 -4 Lowest inflat ion count ries Middle inf lat ion count ries Highest inf lat ion count ries . when inflation is high it hurts company values as well as bond prices. Each portfolio is allocated equally to the constituent countries’ bonds.5 4.2 0 1 0.9 6 6. Thus during periods of continuing and variable inflation. The only exceptions are issuers that are regarded as a credit risky. fixed income investors can be exposed to major drawdowns if inflation and interest rates accelerate ahead of expectations. but also in real terms. at such times. however. This premium increases with duration.

9 3.3 0 1900–2010 -2 0. government bonds can therefore be expected to have a higher expected real return.4 6 5. We assign the 19 Yearbook countries to quintiles that comprise four countries. Bonds in the countries with the highest inflation rates tended to have higher real returns over the subsequent year. globally.2 9. countries are re-ranked and portfolios rebalanced. This motivates us to undertake a cross-country study of the impact of inflation on the real (inflation-adjusted) investment performance of government bonds. This pattern was evident over all subperiods of the 20th and 21st centuries. other than the 11-year period since the year 2000. Bond yields have fallen. as compared to 14.6%. We also find that the volatility of real returns in high-inflation countries is larger than that of lowinflation countries: over the entire period 1900– 2010. During periods of higher inflation.0 3. Returns are in real USD.6 1 1 . the standard deviation of real bond returns in the high-inflation countries was 17. However. bonds are riskier when inflation is higher and uncertain. no investor has access to a crystal ball. Do they on average deliver a higher real return when inflation rates are higher? We look again at the long-term history of the 19 Yearbook countries to address this question. 1900–2010 Source: Elroy Dimson.6 4 4.a. Triumph of the Optimists. The investor could buy the bonds of countries that have reported low inflation for the preceding year.8 2 2. countries are ranked by their annual inflation rate – but now we use inflation for the year preceding investment.4 -1. Paul Marsh.4 4. other than the first quarter-century of the 1900s. 8 7. authors’ updates % p. and at the end of each year. The leftmost bars in Figure 12 show the annualized real returns from each quintile over the full 111 year period. and that from the 1990s to the 2000s it moved. this could be a profitable trading rule – buy the bonds of those countries that are destined to report the lowest inflation rates. The bad times for bond investors have included times that are inflationary.4 1925–1949 1950–1974 1975–1999 2000–2010 1900–1924 Lowest inflation countries Middle inflation countries Highest inflation countries . Government bonds have suffered two big bear markets. The higher long-run real return from high-inflation countries provided some compensation for uncertainty about the purchasing power of bonds in the bond issuer’s economy. from positive to negative. Avoiding accidents Since the beginning of the 21st century. equities have beaten fixed income investments. confirming that bonds were priced so as to provide a higher forward-looking return.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 12 subperiods of the 20th and 21st centuries. government bonds have achieved excellent performance.2 7.3 1 . The inflation premium In terms of purchasing power. bonds were underwater in real terms for about half a century. We have documented the scale of drawdowns from bond portfolios in the UK and USA.8 2. Over the long term. But we also show that attempts to avoid these risks. followed by recoveries. The scope for diversification between bonds and stocks depends crucially on the correlation between the returns on these two asset classes. beating equities in most of the 19 countries in the Yearbook. and on the magnitude of current interest rates compared to the ultra-long-term historical record. but as we show next. As before.6% in the low-inflation countries. and the risk of underperforming in terms of USD returns. and the 21st century has so far deviated from historical precedent. at each New Year. We show that simple domestic diversification between stocks and bonds can reduce downside risk. and compared them to drawdowns from equity portfolios. Income is reinvested. On both sides of the Atlantic. We demonstrate the decimating impact of inflation on contemporaneous bond returns. We present evidence on the extremes of global bond market performance since 1900. Each portfolio is allocated equally to the constituent countries’ bonds.6 3. although the expected investment performance of a blended bond-plus-equity portfolio is naturally lower than an all-equity portfolio. and Mike Staunton.9 7. We report on how the stock-bond correlation has varied over time.7 . and when interest rates are low and then subsequently rise more than expected. that is a quite different strategy and it is not a recipe for investment success. and investors are now concerned about capital losses on their portfolios.6 -0. With a perfect year-ahead forecast of the 19 inflation rates. We show that it is typically quite low. by Figure 12 Real returns: ranking by prior-year inflation.

over the long term. and the choice of instrument to issue. given today’s bond yields. and has a higher volatility of returns. Of course. or that yields. While the long-run return from investing in government bonds has been lower than equities. interest rates fell and the demand for a safe haven increased. A popular view is that bonds are in a bubble. The supply side includes factors such as the impact of the deficit. the future can resemble the more recent past. changes in the scale of bond issuance. and opportunities for portfolio diversification. But the golden age of the last 28 years cannot continue indefinitely. rebalancing the portfolio annually to maintain exposure to high-inflation markets. may provide lower returns. the fact that real returns have been unusually high over several decades does not mean that in future they will be unusually low. Yet expecting bond returns to be lower than in the golden era is not the same as asserting they will enter a protracted period of negative performance. a hedge against deflation. the investment performance of bonds has depended crucially on real interest rates and the impact of inflation. While this is entirely possible. It is sheer fantasy to expect bond performance to match the period since 1982. As inflation receded. giving rise to capital losses. . even on long bonds. An alternative strategy is to buy bonds issued by governments that have experienced high rates of inflation. will go up. This approach is more risky. Only a raging optimist would believe that. there are regulatory changes that affect investor behavior. They continue to provide a safe haven to investors. and the broader supply-demand dynamic is also important. this may be no more than a risk premium for exposure to the bonds issued by inflation-prone countries. While has generated a higher return over the long term. leading to outstanding investment performance from government bonds. like minimum funding requirements for pension funds and capital requirements for life companies.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011_ 13 investing in the bonds of low-inflation countries. inflation expectations are not the sole driver of conventional bond prices. Nevertheless. And government bonds have unique properties and an important role in asset allocation. given their lower risk. Current bond yields – which despite recent rises remain historically quite low – may simply reflect what we can expect. and we must expect returns to revert towards the mean. On the demand side. this is what we should expect.

.

equity investors should expect a return premium compared to government bonds because stocks have higher risk. Equities provide a current dividend yield plus an expected growth rate of dividends. It shows the contribution of income and dividend growth to long-term returns. Finally. they were still low by historical standards. The yield gap is therefore equal to the equity premium versus bonds minus the expected growth rate in dividends. it looks at the risk and return from corporate bonds. Moreover. 5year Treasury yields dipped below 1%. This decomposition of the yield gap into its underlying components helps explain the pattern we see in Figure 1. London Business School In autumn 2010. relative to bonds. there is a belief that higher-yielding stocks not only provide enhanced income. or only a little below those on government bonds. In the depths of the credit crunch. the yield gap equals the expected equity premium versus bonds. Shorter rates were lower still. Over the last 50 years. While investors remain nervous about equities. by tilting their portfolios towards higher-yielding shares and markets. Year-end equity yields were also well below their historical means. just above their post-Lehman crisis level. investors can obtain a prospective yield higher than that from bonds. but equities nevertheless still appeared competitive. minus the expected inflation rate. then equities are the more attractive since. except those where credit risk was a concern. unlike fixed income bonds. US bond yields exceeded equity yields by an average of 3. but are less risky. They argue that if equity yields are close to. both within and across equity markets. While now negative again. they offer the prospect of income growth. Furthermore. US 10-year Treasury yields fell to 2. These historically low rates were mirrored in most developed countries. Expressing this in real terms. tilting towards higher yielders is widely viewed as “safer. minus the expected real growth rate in dividends.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _ 15 The quest for yield Low interest rates on cash and government bonds are causing investors to seek income elsewhere. per se. which marked their low point in over half a century (see Figure 1). should matter. It investigates the performance and risks of strategies tilted towards higher yield. Many investors view the yield gap as a crude indicator of the relative attractiveness of equities. Although bond yields rose sharply by the yearend. while the expected bond return is the current redemption yield. Elroy Dimson. We would expect the yield gap to be lower when the expected inflation rate is . This article examines whether income. Paul Marsh and Mike Staunton. the US yield gap briefly turned positive. in terms of income.9% the so-called “reverse yield gap” (see Figure 1). in uncertain times. it remains low by the standards of the last 50 years as it does in other major world markets.4%.” But can it be that simple? Mind the (yield) gap Setting aside countries whose governments face appreciable credit risk. especially from equities and corporate bonds. while cash yielded close to zero.

In contrast. Thomson Datastream. the longer the investment horizon. capital gains outweigh losses. to be lower when the expected risk premium is lower. Global Financial Data. inflationary expectations had fallen sharply. Global Financial Data 15 10 5 0 -5 -10 Bonds Bonds Bonds Bonds Bonds Bonds Equity Equity Equity Equity Equity Reverse gap Reverse gap Reverse gap Reverse gap Reverse gap Equity Reverse gap US UK Germany End-2010 yield France Japan Switzerland Maximum yield Minimum (month-end) yield Average yield . yield gaps in the world’s major markets remained high by the standards of the last 50 years. Second.4%. equities had fallen sharply. From 1900 to 1959. and to be lower when the expected growth rate of dividends is higher. the more important is dividend income.1% per year.1%. The yield gap was 1. First. The present value of the (eventual) capital appreciation dwindles greatly in significance. while since then it has been mostly negative. Figure 1 shows that the US yield gap was mostly positive (i. and there were significant deflationary concerns. US inflation averaged 2. rather than signaling a buying opportunity for stocks. 0. This effect is not specific to the USA. 0. it has averaged 4. which is where the action is. The most obvious driver has been inflation and inflationary expectations. Fortunately. rising to 1% in the USA at the height of the financial crisis. The premium is the reward per unit of risk that investors require to invest in risky equities rather than less risky government bonds. would have ended 2010 valued at USD 217. Why dividends matter From day to day. Nevertheless. the equity risk premium had increased. In nominal terms. an annualized return of 9. For the seriously long-term investor. 0. while risk had greatly increased. 1900–2010 Source: Elroy Dimson. over a single year.6% in the USA. since then. On balance over the years. Yet despite this. but is true for all equity markets. While year-to-year performance is driven by capital gains.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _16 higher. Dividend income (the red area plot) adds a relatively small amount to each year’s gain or loss. -10 1900 10 20 30 40 50 60 70 80 90 2000 10 Yield (%) on 10-year bonds Yield gap (%) Dividend yield (%) Figure 2 Yields and reverse yield gap. The terminal wealth from reinvesting income is thus almost 100 times larger than that achieved from capital gains alone. even without reinvesting dividends.0%. Year-on-year inflation peaked at 15% in 1980. investors focus mostly on price movements.5% in the UK. In December 2008. including reinvested dividends. reaching USD 21. equities yielded more than long bonds) until the mid-1950s. while the reverse yield gap peaked at over 10% in 1981. Indeed.7 0 -1.6 -5 Our decomposition of the yield gap also helps explain why it turned positive in December 2008. the extreme conditions of the credit crunch were fairly short-lived. 15 10 5 3. and actually positive in Japan and Switzerland. Figure 3 shows that equities are so volatile that most of an investor’s performance is attributable to share price movements (the blue bars). the value of a portfolio corresponds closely to the present value of dividends. which started in 1900 with an investment of one dollar. Indeed. long-term returns are heavily influenced by reinvested dividends. this is an annualized capital gain of 5. The blue line plot in Figure 3 shows that a US equity portfolio. Third. Figure 2 shows that by end-2010.766 by the end of 2010. Paul Marsh and Mike Staunton. Paul Marsh and Mike Staunton. The red line plot in Figure 3 shows that the total return from US equities. grows cumulatively ever larger than the capital appreciation. dividends seem slow moving. expected dividend growth had been revised downwards. 1950–2010 Sources: Elroy Dimson.4 1. making investors poorer and more risk averse. continuing low interest rates have led many investors to look increasingly to equities and dividends for income.7% in France. Figure 1 US bond and equity yields.2% in Germany. These yield gaps simply reflect the current consensus about market conditions.e. and the yield gap in most countries has again fallen.

long-term dividend stream. A hen for her eggs. and New Zealand. and only four enjoyed real dividend growth above 1% per year. Figure 4 shows that 10 out of 19 Yearbook countries recorded negative real dividend growth since 1900. The Theory of Investment Value (but bear in mind that financial poetry seldom rhymes): A cow for her milk. Dividends. inflationadjusted growth. Over the last 111 years. When analyzing investments. with real dividends on the world index falling by 0. Dividend growth was lower in the turbulent first half of the last century. i. equities offer the prospect of dividend growth.83% per year. John Burr Williams. By definition. and probably earnings. but over the long run. But what matters is real. Finally. Dividends have invariably been the largest component of real returns. but what does this mean for investors? It would be trite to advise that dividends should be reinvested and this would be inappropriate for investors who need income. The red bars show the annualized change in the price/dividend ratio (the reciprocal of the yield) from 1900 to 2010. authors’ updates 75 Annual return (%) 50 100000 Cumulative value: 1900 = USD1 21.4% per year Annual capital gain US: capital gain 5. It would also be wrong to conclude from the analysis above that investors should prefer dividends to capital gains or seek out high-yielding stocks. the key issue is to assess the company’s potential to distribute cash to shareholders not necessarily today. dividends are central to stock valuation. Australia.766 10000 25 1000 217 0 100 -25 10 -50 1900 10 20 30 40 50 60 70 80 90 2000 10 1 Annual dividend impact US: total return 9. From the earliest days of formal security analysis. Figure 4 also shows how dividend yields have changed over the long run.1 4 3 2 1 0 -1 -2 -3 Jap Ita Bel Ger Den Ire Fra Spa Net Nor Swi UK Fin Wld Can SAf Aus NZ US Swe Mean dividend yield Real dividend growth Change in price/dividend ratio 0. Figure 3 Impact of dividends. dividends have played a central role in valuation. by short-term price fluctuations.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _ 17 Dividend growth Unlike fixed-income investments. wrote the following stanza in his 1938 classic. Real dividend growth has been lower than is often assumed. The sense in which dividends are irrelevant Dividends are thus a key component of long-run returns. the father of investment analysis. the real annualized equity return in each country is equal to the sum of the three bars shown for that country.8 0. Real dividends grew in just three countries: the USA. United States. the mean dividend yield plus the real growth rate in dividends plus the annualized change in the price/ dividend ratio. Williams’ point remains true today. bolstered by the heavy weighting of the USA.3% per year. First. dividends have grown in nominal terms in every Yearbook country.0% per year Figure 4 Components of equity returns globally.e. The price/dividend ratio of the world index grew by 0. Paul Marsh and Mike Staunton. 1900–2010 Source: Elroy Dimson. price/dividend ratios have risen (dividend yields have fallen) in 16 of the 19 countries. the blue bars in Figure 4 show the mean dividend yield in each country from 1900 to 2010. But there are two conclusions we can draw. The value of a share is simply the discounted value of its future. And a stock by heck For her dividends. Paul Marsh and Mike Staunton 5 4. Real dividends on the world index grew by 0. But from 1950 to 2010. 1900–2010 Source: Elroy Dimson. Figure 4 shows the Yearbook countries and world index ranked by their annualized real dividend growth over 1900–2010 (the gray bars). Second. real dividends grew everywhere except New Zealand. or daunted.5 . and the world index enjoyed far healthier real growth of 2. Historically. have barely outpaced inflation. Triumph of the Optimists. investors should focus on the long term and not be too influenced.48% per year.9% per year.

dealing costs matter. defined as the geometric difference between the returns on high. the data starts after 1975. as investors with lower current income needs may favor low-yielding shares. with the premium based on the highest. The dark blue bars show the premiums over the longest period available for each country. Low yield 9. of course. authors’ updates Annual return (%) Cumulative value: 1900 = GBP1 100. investors should be indifferent between dividends and capital gains. the latter may be favored in many tax jurisdictions.3% p. Triumph of the Optimists. while those with high income needs may prefer high-yielders. But the same initial investment allocated to high-yield stocks would have generated GBP 100. the middle 40%.9% per year Annual yield premium Low yield 8. and equivalent to an annual return of 10. since the 1970s. The bars in Figure 7 show the annualized yield premium. which is almost 20 times greater. 1927–2010 Source: Professor Kenneth French. Figure 7 shows that the yield effect has been evident in almost every country examined.4% p. and Singapore. Non-dividend paying stocks gave a total return of 8.122 by the end of 2010.0% per year . This chart covers 21 countries all the Yearbook countries except South Africa.or lowest-yielding 30% of dividend-paying companies.122 1000 10 0 100 -10 10 -20 1900 10 20 30 40 50 60 70 80 90 2000 10 1 Rolling 5-year annualized yield premium High yield 10. the yield premia are taken from the much longer studies reported above. 0 27 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 High yield 11.and low-yielders. while for the USA and UK.a. to avoid reinvestment costs. documented a marked historical return premium from US stocks with an aboveaverage dividend yield. plus Austria.160 100000 20 10000 5. Prior to the start of each year. Figure 5 shows his most recent data. may lead some investors to prefer either income or capital gains indeed. covering the performance since 1927 of US stocks that rank each year in the highest.9% per year. The longest study of the yield effect by far is our 111 year research for the UK. 1900–2010 Source: Elroy Dimson.4% per year.2%. the 100 largest UK stocks are ranked by their dividend yield. high-yielding stocks outperformed low-yielders.160.000 6. Figure 6 Returns on UK stocks by yield. Medium yield 10. And if dividends exceeded their needs.and lowestyielding 30% of dividend-paying companies. while low-yield stocks returned 9. Figure 6 shows that an investment of GBP 1 in the low-yield strategy at the start of 1900 would have grown to GBP 5. a number of US researchers have. Similarly. For a few countries. Dartmouth (website) 10. Tax. Hong Kong.and lower-yield stocks.000 100 10 1 0.1% and high-yielders gave 11. they could make up the difference by selling stock. to avoid selling costs.a. Franco Modigliani and Merton Miller pointed out that.903 3.a. there will be clienteles of investors that prefer one rather than the other. The capitalization weighted returns on these two portfolios are calculated over the following year. The exception was New Returns on US stocks by yield.a. They argued that if investors received too little income from dividends.424 853 1. matters since dividends are usually treated as income and stock sales as capital gains. This.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _18 Fifty years ago. and stocks that pay no dividends.2% p. The most up-to-date analysis is by Kenneth French of Dartmouth University. Tuck School of Business. they could reinvest them. and this procedure is repeated each year.1% p.686 1. Paul Marsh and Mike Staunton. Dividend tilts Despite the arguments put forward by Modigliani and Miller. For most countries. In 20 of the 21 countries. The underlying portfolio returns data were again generously provided by Ken French. Zero yield 8. while there may be no overall market preference for dividends versus capital gains. This insight helped Merton Miller to win a Nobel Prize. an annualized return of 8. Thus. the period covered is the 36 years from 1975 to 2010. and divided 50:50 into higher. setting aside taxes and dealing costs.0%. plus factors such as withholdFigure 5 ing taxes.

two other small markets. often pay low or no dividends. Feifei Li. Paul Marsh and Mike Staunton analysis using style data from Professor Ken French. The impact of tax is controversial. since the companies wish to reinvest in future growth. the average premium was a striking 4. it may simply be by chance and hence unlikely to recur. Arnott and his colleagues found that the market had correctly identified the growth stocks. comparing the stock prices at the time with what they termed “clairvoyance value. where the analysis was based on a sample of just 20 stocks. The light blue bars in Figure 7 show the yield premium over the 21st century to date. The final possibility is that the outperformance of value stocks is simply a reward for their greater risk. based on the same 21 markets over the identical time periods. Indeed. Across all 21 countries. Value stocks are those that sell for relatively low multiples of earnings. Also. perhaps causing growth stocks to sell at a premium. Explanations for the yield premium The yield premium is now widely viewed as a manifestation of the value effect. if tax were the major factor. They analyzed the constituents of the S&P 500 in the mid 1950s. there was a yield premium pre-1914. A third possibility is that investors become enthused about companies with good prospects.” This was the price investors should have paid if they had then had perfect foresight about all future dividends and distributions.or low-yielders tumbled from their dizzy heights as investors re-engaged in stocks with strong fundamentals. more than twice the level of the longer-term period reported above. by up to twice as much as was subsequently justified by the actual dividends and distributions to shareholders. This helps explain why Ireland and Belgium experienced a negative yield premium. outperformed growth stocks for a review. 35: 12– 26). Furthermore.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _ 19 Zealand. namely. and Katrina Sherrerd in a study entitled Clairvoyant Value and the Value Effect (The Journal of Portfolio Management. But this is hard to sustain. We have analyzed the most commonly used alter- native measure. and averaged a staggering 9. Over this period. even more show that value stocks have.1%.e. because their stock prices anticipate cash flows (and dividends) that are expected to grow. except in Denmark and Ireland. In the context of yield. risk is the prime suspect. Since value stocks are often distressed companies. Why have high-yielders outperformed low. as while there can be lengthy periods when the effect fails to hold. when income tax was just 6%. This period embraces the dot-com bust. alternative definitions of value and growth stocks would work far less well than dividend yield as an indicator of high or low subsequent performance. where it was less than 1% per year. Arnott classified growth stocks as those selling at a premium. but tax alone cannot explain the large premium. hard-line believers in market efficiency argue that. book value. value stocks or high-yielders may be mature businesses. the risk argument seems plausible. While many studies document the yield effect. which is a very small market. They sell on relatively high valuation ratios. However. and bid the prices up to unrealistic levels. Tuck School of Business. so growth stocks sell at a premium to fundamental value. price-to-book or price-to-sales. in the UK. Both markets were heavily weighted towards banks which. But are highyielders really riskier than low-yielders? Figure 7 The yield effect around the world Sources: Elroy Dimson. dividends or other fundamental variables. media and telecommunications stocks mostly zero. Growth stocks. A second possibility is that we are observing a tax effect. over the long run. including dividends. But this period also spans the credit and financial crisis. on a lower dividend yield or at a higher priceto-earnings. while previously high yielding.and zero-yielders? There are four possibilities. the 11 years since the start of 2000.4% per year. i. whenever we see persistent anomalies. First. subsequently experienced very poor performance. the premium was positive in 19 of the 21 countries. and found that it performs almost as well as yield. it has nevertheless proved remarkably resilient both over the long run and across countries. the yield premium was appreciable. in contrast. or else dividend payers with a depressed share price that reflects recent or anticipated setbacks. when technology. Evidence for this was provided in 2009 by Rob Arnott. since many countries’ tax systems have favored capital gains. see our companion Sourcebook. they also concluded that investors had overpaid for this growth. in that they did indeed exhibit superior future growth. In most other countries. This could also explain Arnott’s findings if the discount rates used to compute “clairvoyance value” had failed to cater adequately for differences in risk. Dartmouth (website and private correspondence) and Dimensional Fund Advisors Yield premium (%) = = 15 10 5 0 -5 NZ Den Ire US Swi Bel Ita UK Sin Ger Fin Avg Can HK Aus Net Nor Spa Swe Jap Fra Aut Longer term Since 2000 = . book-to-market.

6 0. What is more surprising is that the average standard deviation of returns from invest- Figure 8 Risk and return from alternative yield strategies Sources: Elroy Dimson. but are less risky.15 Standard deviation (% p. and the country index is far better diversified than the other strategies. While cash is certainly safer than stocks.00 0. Our measure of the market is provided by the MSCI country indices.6 24. For each of the four investment strategies. They have acquired their high yield because their stock price has fallen. is whether yield-tilt strategies lead to higher risk.23 0. we therefore need to analyze the data. Looking first at the lefthand panel. Dartmouth. Investors may also perceive high-yielding stocks to be lower risk because of sector membership. an index fund holding in each country.30 0. Such companies may be struggling or distressed.) Higher yield Lower yield Beta Zero yield Total country Sharpe ratio Figure 9 Sharpe ratios from alternative yield strategies Sources: Elroy Dimson. as volatility is reduced by diversification.0 21. MSCI and Thomson Reuters Sharpe ratios 0.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _20 Risk and return from high-yield strategies The key question. i. For the USA.2 0. this should have been factored in when deciding on the desired exposure to equities in the first place. Tuck School of Business. the yield premiums reported in Figure 7 could just be risk premiums.e.98 0. On the contrary. Dimensional Fund Advisors. lower-yielders (the lowest yielding 30%). Dimensional Fund Advisors. To maintain this exposure. But investors may well once have thought the same about bank shares. betas (middle panel) and Sharpe ratios (right-hand panel). many high-yielding stocks are “involuntary” high yielders.04 1. and the overall market. Dartmouth. which at most embrace 30% of the stocks in the market. Tuck School of Business. To see the fallacy.9 0. we need to hold constant the investor’s desired holding in stocks. To establish whether high-yield strategies are higher or lower risk. Paul Marsh and Mike Staunton analysis using style data from Professor Ken French. Figure 8 shows the average values for the 21 countries of the standard deviation of returns (lefthand panel). and their future dividend may be far from assured.89 1. If they do. therefore. the funds are again exposed to equity risk. but once reinvested. where we use Ken French’s much longer series starting in 1926. Utilities tend to have higher yields and are also generally of lower risk. Furthermore. the standard deviation of returns on the lower and zero yielders were both larger than on the higher-yielding stocks.4 0. zero yielders. we estimate the risks and riskto-reward ratios from investing in higher-yielders (the highest yielding 30% of dividend payers). For each of the 21 countries represented in Figure 7. we use the DMS US index for the market. Paul Marsh and Mike Staunton analysis using style data from Professor Ken French.a. If so.0 Ita Spa Jap Avg US Sin Ger Swi UK Net Fra Aus Can Swe HK Zero yield Lower yield Total country Higher yield . believing instead that high-yielding stocks not only provide enhanced income. MSCI and Thomson Reuters D Averages across 21 countries 33. This is to be expected. Many investors would find this counterintuitive.42 22. there is clearly no evidence that higher-yield strategies are more volatile. this reflects a misunderstanding. This belief may stem from the view that a bird in the hand (a dividend in the bank) is more secure than two in the bush (future returns).4 0. since the data that we are using are based on each country’s MSCI universe. investors will need to reinvest their dividends. The least volatile of the four strategies is an investment in the market.

Finally. It thus measures the reward per unit of volatility. and almost treble that of the zero-yield strategy. in terms of reward for risk. Portfolios are held for one year.72 for the portfolio of highest-yielding countries versus just 0. Each quintile portfolio has an equal amount invested in each country.89) than both the lower. We assign countries to quintiles. the higher-yield strategy beat the lower. The returns would just need to be multiplied by the appropriate common currency scale factor (published in the Sourcebook).000 some 2. where it was a close runner-up. Country yield tilts Higher-yielding stocks have outperformed loweryielders. Over all of these sub-periods. Figure 10 Returns from selecting markets by yield Sources: Elroy Dimson.0 by definition). It is therefore hard to explain the superior performance of yield-tilt strategies in terms of risk. or the contribution to the risk of a diversified portfolio. The remaining five sets of bars in Figure 10 show the returns over the four quarter-century periods making up the 20th century as well as the returns over the 21st century to date. the right-hand panel of Figure 8 shows the historical average Sharpe ratios. and the Sharpe ratio was 0. These figures are before tax and transaction costs.and zero-yield strategies in every country. but it also had a lower average beta than an investment in the market (1. We investigate this by examining the 19 Yearbook countries over 111 years.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _ 21 ing in high-yielders (22. except the middle quintile which contains three. However. The returns shown in Figure 10 are measured in US dollars from the perspective of a US-based global investor. it is the value stocks that have the lower volatility and beta. It also dominated an index fund investment in every country except Switzerland. At each New Year. each comprising four countries. The results are not therefore period-specific. Nor are they attributable to risk. the betas against the 19country world index were approximately the same. It was also appreciably higher than the average Sharpe ratio achieved by investing in the country index funds. The Sharpe ratio of the higher-yield strategy (0.and zero-yield strategies. There is a perfect ranking by prior yield and the differences between quintiles are large. But the same initial investment allocated to the highest-yielding countries would have grown to an end-2010 value of more than USD 1. Beta measures systematic risk.4% per year. so perhaps higher-yielding markets have also outperformed lower-yielders. when growth and value stocks are defined based on dividend yield. but the performance gap is too big to be attributable to tax.) 15 10 5 0 1900–2010 -5 Lowest yield Lower yield Middling yield Higher yield Highest yield 1900–24 1925–49 1950–74 1975–99 2000–2010 . countries are ranked by their dividend yield at the old year-end.4%). the pattern would look the same from the perspective of a global investor from any other country.42) was almost twice that of the lower-yield strategy. Indeed.a. an annualized return of 5. An investment of one dollar in the lowest-yielding countries at the start of 1900 would have grown to USD 370 by the end of 2010.5%. and equivalent to an annual return of 13.700 times as much. and all income is reinvested.35 for the lowest yielders. The center panel of Figure 8 shows that the higher-yield strategy not only had a lower average beta (0. this multi-country trading rule based on prior yield would have generated significant profits at no higher risk. repeating the process annually. We then re-rank the countries and rebalance the portfolios.6%) is only marginally higher than that from an index fund (21. Paul Marsh and Mike Staunton Return (% p. but are “noisier” due to less diversified portfolios). The Sharpe ratio is defined as the average historical excess return (the return over and above the risk free or Treasury bill return) divided by the historical volatility of excess returns. The returns from investing in the lowest-yielding countries were slightly more volatile than investing in the highest-yielders.000. It shows that. the high-yielding countries outperformed the low-yielding countries by an appreciable margin. Clearly. Figure 9 shows the Sharpe ratios for the larger countries in the sample (the smaller country results paint a similar picture. The leftmost set of bars in Figure 10 shows the annualized returns from the quintiles over the full 111-year period. at least as conventionally defined.

But the key question for investors is not what the promised yields have been. with the blue line plot in Figure 11 hitting an offthe-scale 8. The second worst episode for default rates followed the recent credit crisis and. Corporate bonds are subject to credit risk. the long-run return premium of 0. Barclays Capital. and potential loss arising from. default rates and equity volatility Sources: Elroy Dimson. i. have led to a flood of corporate bond issues. It is interesting to see whether this return experience is consistent with default rates. This is remarkably close to the promised yield spread on Aaa bonds. 2011). Here. Companies also issue preference stock. showed that the long-run return on the highest grade US corporate bonds over the 111 years from 1900 to 2010 was 2. which was 0. For corporate bonds. reliable corporate bond data has been available only since the 1990s. all coinciding with a recession. filing for bankruptcy. Figure 8 of the companion article.e. . Antti Ilmanen Expected Returns (Wiley. and the latter has averaged around 40% over time. while for high-yield bonds. Figure 11 shows that there are several spikes in default rates. This has averaged just 0. Furthermore. Paul Marsh and Mike Staunton. bonds have proved tempting to investors who are on the quest for income. and for some countries even later. the default rate has averaged 1. The average loss from default on investment grade bonds has thus been just 0.09% per annum. while that on high-yield bonds was 13%. and more importantly. as this is the only country for which there is good quality. The light blue line plot in Figure 11 shows the default rates on all rated bonds. Moody’s.8%. or a change in credit rating. the promised yield on US bonds rated by Moody’s as Aaa (the highest quality bonds issued only by blue chip companies) has been 0. the default rate on all rated bonds was 5. in 2009. rather than sovereign.68% per year for high grade Aaa rated corporate bonds which would have had even lower default rates seems puzzlingly high. Figure 11 Corporate bond spreads.9% above Treasuries. the average was 2. Fear of Falling. Bloomberg. the lowest grade bonds deemed by Moody’s still to be “investment grade. Baa bonds.a.” and which they judge to be “moderate credit risk” have had a yield spread of 1. the actual default losses are smaller than the default rates. Global Financial Data Credit spreads and default rates (%) Volatility (% p.68% per year more than on US Treasuries.. Default rates were highest following the Wall Street Crash and during the Great Depression.52% per year. which was 0. restructuring. we look at the longrun evidence. coupled with continued restraints on bank lending.7% higher than on US Treasuries.) Baa-Aaa spread (%) Default rates: all rated (%) Default rates: investment grade (%) Historically. Similarly. the higher coupons promised from corporate. Elsewhere. Naturally.4% in 1933. while high-yield bonds had a default rate that year of 15. which refers to the probability of. a credit event such as defaulting on scheduled payments.4%. We have to rely here on the US experience.a.70% above Treasuries.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _22 Corporate bonds and the quest for income Equities are not the only income-bearing security issued by corporations. To answer this question. the default rates on non-investment grade corporate bonds have been higher. The red line plot in Figure 11 shows the default rate over time on investment grade bonds. and this fails to qualify as “long run” by the standards of the Yearbook. but what returns investors have really achieved. Given the low default rates shown in Figure 11 on investment grade bonds.) 6 75 4 50 2 25 0 1919 1930 1940 1950 1960 1970 1980 1990 2000 2010 0 Volatility of US equities (% p. corporate bonds. Annual losses can be estimated by multiplying the default rate by one minus the recovery rate. low interest rates. consistent. with no defaults. including speculative grade or high-yield bonds. Recently. the promised yield can appear misleadingly high because it is predicated on the assumption that all the cash flows from the bond the coupon and repayments will be paid on time.15%. long-run data.4%. those rated below Baa.14% per year.

and will thereby eliminate much of the idiosyncratic risk associated with corporate bond credit risk. and the present time. we have shown that an equity investment strategy tilted towards higheryielding markets would have paid off handsomely. For example. and the tendency of investors to fall in love with. If so. Further. it is harder to defend having made such investments. If things go wrong. there can be extended periods when the yield premium goes into reverse and low-yielders outperform. as they often do. positive betas) because. it seems likely that other factors are at work. But there is asymmetry here. perhaps there is some dimension of risk that we are missing. corporate bonds are highly exposed to the risk of severe recessions. hold a diversified portfolio of corporate bonds. investors will one day learn their lesson and stop rising to the bait of growth. the strategies we have described require a rigorous rebalancing regime. Sensible investors will. much of the 1990s. The reason is that in addition to idiosyncratic risk. These findings have been robust over long periods and across most countries. it may reveal itself in an unwelcome way to highyield investors of the future. First. Thus future yield effects may be more muted. historically. These include the early 1980s. and surely will with at least some of the portfolio stocks. we should always be cautious of any phenomenon when we do not fully understand its causes. investment strategies tilted towards higher-yielding stocks have generally proved profitable. Third. as we have seen from Figure 11. While relatively safe for most of the time. as with all investment styles. tax systems today are more neutral between income and capital gains than was the case in the past. Figure 11 shows that there is a high correlation between credit spreads (the dark blue line plot shows the spread between Baa and Aaa yields) and US equity market volatility (the grey shaded area). The resultant portfolios can then often appear unappetizing. If so. default is more likely to occur in recessions when all businesses are doing poorly. and overpay for growth. While we have seen that the yield premium is not related to risk as conventionally defined. While higher risk would seem an obvious explanation. Some cautionary notes are clearly in order. we have documented the importance of dividends to investors. troubled or even distressed. high-yield investors have needed to remind themselves that no investment style remains out of fashion indefinitely. An investor who chases markets that offer a high dividend yield may also be more exposed to political risks and an inability to access assets than an investor who diversifies globally. providing further evidence that corporate bonds face considerable market risk. The transaction costs and fees for a globally rotated equity portfolio are also larger than for an international buyand-hold strategy.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _ 23 Part of this credit premium is undoubtedly a risk premium. We have shown that. Yielding to caution In this article. but given that the risk has generally been low. Perhaps part of the historical yield premium has arisen from taxation.e. At such times. The yield premium across markets may reflect historical periods when countries were not integrated internationally. so part of the credit premium may be compensation for illiquidity. If so. This raises the question of why corporate bond holders should expect any risk premium at all. our research indicates that portfolios of higher-yielding stocks (and countries) have actually proved less risky than an equivalent investment in lower-yielding growth stocks. just maybe. More popular growth stock stories are easier to justify. corporate bonds are typically much less liquid than Treasuries. . then maybe. corporate bonds also have market risk (i. Many believe that the yield effect is driven by behavioral factors. of course. and when market rotation was not feasible for the majority of investors. Highyield is frequently synonymous with challenged. It can require courage to invest in such stocks (and markets). It reveals that there have been extended periods when even the rolling five-year premium has remained negative. But such periods can be long enough to severely try the patience even of those whom we would normally regard as long-term investors. with corporate bonds facing appreciable tail risk. Second. The dark shaded area in Figure 6 on page 18 shows the annualized. rolling five-year yield premium in the UK over the last 111 years.

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For example. David Holland and Bryant Matthews. which can be used in making equity allocation decisions. Historical forwardlooking results are presented for US industrials that indicate that. Investors might ask whether they are being properly compensated for the risk they are taking in developing markets. forward-looking estimates of market-implied returns coupled with long-term benchmarks make excellent additions to the toolkit of fund managers and risk managers. The HOLT framework was used to calculate the forward-looking real cost of capital. which we term the HOLT discount rate. which should prove beneficial in discussions aimed at understanding the future direction of this discount rate. The long history of the Global Investment Returns Yearbook is an outstanding resource for understanding this time dependency and how it has behaved in various countries. We identify key drivers to explain the real cost of capital.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _25 Market-implied returns: Past and present Estimates of the cost of equity and its equity risk premium (ERP) are based on historical equity returns and highly dependent on the period studied. This paper provides a practical means of assess- ing risk and its corresponding return. the real cost of capital and its corresponding ERP appear to fluctuate significantly. Finally. We use the results to identify risk regimes and comment on interesting periods. a process similar to calculating a yield-to-maturity on a bond. For instance. under certain assumptions. the country profiles in the Yearbook reveal that the premium earned over the past decade in many developing countries has far exceeded that of their developed counterparts. developing and resource-rich markets have optimistic expectations embedded in their equity prices and trade at lower implied returns than their developed counterparts. The relationship is diagrammed as follows: Given N Forecast Enterprise Value i FCF i DR ) i 1 (1 Solve HOLT uses consensus analyst estimates and its proprietary fade algorithms to forecast future asset growth and profitability. What is the HOLT discount rate? The HOLT market-implied discount rate is a real cost of capital solved by equating the market value of equity and debt to the discounted value of future Free Cash Flow (FCF) generated by HOLT’s algorithmic forecasts. This calculation is performed on a . Credit Suisse HOLT This article complements findings presented in the Global Investment Returns Yearbook and Sourcebook by presenting market-implied returns. which provide the necessary ingredients to estimate a firm's future free cash flow. so they can look ahead with a sense of historical balance. Will this be the case going forward? Spot. we conclude by showing present discount rates for a number of countries and comment on their market expectations.

and naturally susceptible to forecasting errors. Corporate profitability improved dramatically and risk appetite swelled. A high discount rate is indicative of a risk-averse market where investors demand more return on their capital due to fears about the future. Extraordinarily high discount rates indicate panic and excessive fear. From 1970 to 1985. This forward-looking proxy may differ from the historical asset return series provided in the Yearbook and Sourcebook since it is dependent on a forecast of cash flows.8%. These states are illustrated in Figure 2. is not the basis of the near-term Figure 1 Time series of market-derived discount rates – USA Source: Credit Suisse HOLT. A low discount rate is symptomatic of a market with a greedy risk appetite. Once company-specific market-implied discount rates are determined. 17 January 2011 Jan 1950 . a challenging task indeed.1% and yields below it are indicative of an overheated. in today’s parlance. “risk on” and “risk off.1% Jan-06 Jan-08 Jan-10 1 Please contact the HOLT team at Credit Suisse for more details about the HOLT framework and the discount rate calculation. but rather the application of mean-reverting. The market veers between states of greed and panic. which are derived from consensus analyst earnings expectations. When analyst and/or investor expectations become overly buoyant or pessimistic. Monthly results were calculated as of 1975. Market Derived Discount Rate (%) 7 6 5 4 3 2 1 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 75%ile 75th percentile: 7. The results can be seen in Figure1. regression is used to determine the average forward-looking expected cost of capital. The top quartile sits at 7. empirical fade rates to the profitability (CFROI) and growth forecasts. please see “Beyond Earnings: A User’s Guide to Excess Return Models and the HOLT CFROI® Framework" by David Holland and Tom Larsen.1% Neutral market: US DR = 5.e.1% and indicates a super-chilled riskaverse market. The vital link which lends credibility to this exercise.1 25%ile 25th percentile: 5.Jan 2011 9 8 cash flow estimates. or. Ronald Reagan spoke of the “days of malaise” when running for the US presidency – it was more like a decade and a half of malaise. we divided the chart into quartiles.8% Super-chilled market: US DR > 7..8 Figure 2 Discount rate thermometer Source: Credit Suisse HOLT Overheated market: US DR < 5. The first thing to note is that the market-implied discount rate rarely rests at its median of 5.1 Jan-50 Jan-52 Jan-54 Jan-56 Jan-58 Jan-60 Jan-62 Jan-64 Jan-66 USA DR Current DR: 5. except for a brief respite in the mid-1970s. risk-hungry market.4% in January 1990 to a low yield of 2.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _26 weekly basis for various countries and regions. The results in this paper are enterprise value-weighted discount rates for industrial firms. . i. providing a powerful signal during these moments for investors who place faith in mean reversion. the chart indicates that the US real discount rate was marooned above 7%. to periods of euphoria and despair. The use of empirical fade rates provides a compelling case-study since it synthesizes invaluable historical data with the contemporaneous views of analysts and investors.” To give a sense for different risk regimes. in each country or region studied.1 Jan-72 Jan-74 Jan-76 Jan-68 Jan-70 Median Median: 5. If you would like to study the CFROI framework and its mechanics. however. The resulting cost of capital is crucially sensitive. non-financials. The bottom quartile sits at 5. the empirical fade framework guides the forecast back within the bounds of normalcy. Matters were flipped on the head in the 1990s. with the discount rate falling from 6.1 Historical US market-implied discount rate We’ve calculated the weighted-average real discount rate for US industrial firms back to 1950 using the HOLT framework. therefore.5% at the peak of the Tech Bubble in early 2000. Extraordinarily low discount rates indicate euphoria and excessive greed.

This increase has put a squeeze on the US ERP and will take the shine off equities if it continues to climb to its norm. The market-implied ERP varies significantly. Discount rate driver model We have seen that the discount rate is a powerful quantitative signal.e. A robust global recovery would stoke inflation and long-term Treasury yields. 4.1%. Extreme bouts of optimism and pessimism generally indicate a loss of faith in mean reversion. Our results agree with both findings. We use the 10year Treasury bond as a proxy for the risk-free rate. risk appetite returned with hibernating hunger. which are reflected in lower discount rates.0 75%ile 75th percentile: 5. again indicating a ravenous appetite for risk.8%. the discount rate signal (Figure 1) indicates that equities are expensive relative to their long-term history. We’ve seen the bond yield increase since November due to greater confidence in a global recovery. Analysts looking at long-term valuation metrics such as Robert Shiller’s CAPE generally refer to today's US stock market as expensive. This is not to say that markets will not run further. It dipped below 0% during the Tech Bubble. Please note that there is no tax shield term in the discount rate equation due to the fact that HOLT captures tax shields in its cash flow calculation. Again. Since 1960. Readers with an eye for contradiction might be asking the question. which is in line with the long-term findings of the Yearbook. the US discount rate is 5. or will the world really be so dark in times of pessimism? The signal is only as good as the forecast assumptions. and we see this argument occurring in today's financial press. The ERP estimate over the past year has been attractive in large part due to the low real yields of US Treasuries. the US discount rate rocketed to a bearish 7. many investors were of the view that the discount rate would remain elevated for years to come. “How do you reconcile the sell signal of Figure 1 with the buy signal of Figure 3?” Times are anything but ordinary.” the ERP sat at 2% or less.1 25%ile 25th percentile: 2.Jan 2011 10% 8% 6% Equity Risk Premium (%) 4% 2% 0% -2% Jan-60 Jan-64 Jan-68 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-76 Jan-80 Jan-70 Jan-08 Jan-74 Jan-78 Jan-90 Jan-04 Jan-66 Jan-72 Jan-82 Jan-94 Jan-98 Jan-06 Equity risk premium Current ERP: 5. indicating that risk appetite was overzealous. we have divided the chart into quartiles to give an indication of different risk regimes. By knowing the discount rate DR. At the peak of the Credit Bubble in the “Noughties. we identify explanatory factors and generate a set of questions investors should ask themselves. while the ERP is attractive (Figure 3). 17 January 2011 Jan 1960 . i.4 Jan-10 Jan-62 Jan-86 Jan-02 -4% . our results indicate that markets are as much psychological and irrational as they are fundamental and rational. The HOLT discount rate is useful as a quantitative gauge of the market's risk appetite. Figure 3 Market-implied equity risk premium – USA Source: Credit Suisse HOLT. Those who focus on yields relative to Treasuries label the US stock market attractive. Disagreement about its level and implicit signal should be welcomed because it can lead to a healthy debate about future projections within a well-defined framework.1%. After Lehman Brothers collapsed in September 2008. Readers should remember that the ERP at each point in time is forward-looking: risk hungry markets will have a low ERP and risk-averse markets will have a high ERP. the market leverage xD and estimating the corporate cost of debt rD. so good news can translate into positive market momentum leading to higher share prices.4 Median Median: 4.. “can it be explained and possibly predicted?” In this section. At the time.e. This prompts the question. Our estimate of the market-implied ERP is shown in Figure 3. If anything. i. We would caution bullish investors that the risk premium will only stay high so long as Treasury yields remain low. Will future profitability and growth really be brighter in times of blue-sky optimism.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _27 The US discount rate remained below 5% from 1996 until 2008. we can estimate the market-implied ERP via these equations: DR = xDrD + (1 – xD)rE rE = rf + ERP The risk-free rate is denoted by rf and the market-implied cost of equity by rE.4% is the premium for the US equities versus bonds over the past 111 years. especially in times of euphoria and despair. the charts show that risk appetite is far from outright euphoria. In fact. Today. Today’s US ERP estimate has dropped to 5. the median ERP for the US has been 4%.

87 1. The chart shows today's discount rate for each country along with its minimum.69 2. Investor tax rates also influence the cost of capital as they diminish investors’ after-tax return. The chart goes from countries with low marketimplied returns at the left to countries with high returns at the right.52 0. At the other end of the spectrum. –0. greatest to the least risk appetite. inflation is also a significant discount rate driver.09 –1. deflation or moderate inflation? Worldwide market-implied discount rates Figure 4 Contribution of various discount rate drivers Source: Credit Suisse HOLT 17 January 2011 HOLT Risk Attribution Model 10 9 8 7 6 5 4 3 2 1 0 -1 2002 m1 2006 m1 2008 m1 1988 m1 1978 m1 1976 m1 1980 m1 1982 m1 1984 m1 1986 m1 2010 m1 2000 m1 2004 m1 1996 m1 1998 m1 1990 m1 1992 m1 1994 m1 Inflation IP volatility Marginal tax rates Over corporates Over risk-free LT real yield 1. Behavioral studies routinely show that human beings tend to overestimate growth and are overly optimistic. Key questions to ask when considering which way the discount rate might move include: Where is the yield on the 10-year Treasury heading? Will credit spreads tighten? Will volatility remain subdued or increase? Will investor taxes increase? Will markets experience hyper-inflation. Shrewd investors can take positions on the future direction of each driver and contemplate the direction of future discount rate moves.5% Discount rate Table 1 Component risk contribution Source: Credit Suisse HOLT Explanatory factor Inflation Industrial production volatility US Treasury yield (real rate) Corporate bond yield Marginal tax rates Average real discount rate Average 1. Intuitively. Investors need to ask if they are being properly compensated for the risk they are taking in developing markets.00 Date 1980m3 1976m2 1983m8 2008m12 1988m1 What about today's real discount rate for other markets? Are they expensive or cheap? How do they compare to their respective histories? We have plotted the results for the G20 (plus Switzerland) in a box-and-whisker chart in Figure 5.04 1. Table 1 shows an investor’s average required return per economic indicator. Volatility creates uncertainty. Expectations of higher inflation fuel higher effective real tax rates for investors.49 6.53 2. i. These results provide more than mathematical curiosities. and which factors are contributing most at any given point in time. It is clear that developing and resourcerich markets dominate the left-hand side of the chart.e. These hallmarks appear to be embedded in market expectations for developing markets.37 Date 2009m7 1989m1 1980m6 1978m12 1981m1 Max. In fact. investors have pushed the valuations of these markets into dear territory. HOLT’s discount rate can be decomposed into key economic drivers to highlight how the risk premium has evolved historically. 6.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _28 Investors’ required rate of return is influenced by historical and current events. Clearly. we can see that markets are not particularly sanguine about Europe and Japan.. The first two statistically significant discount rate drivers are the real risk-free rate and the spread of BBB credit over the risk-free rate. The effect of each driver over time can be seen in Figure 4. a premium is required for investing in lesssafe equities over Treasuries. .73 0.31 –0. which feeds into a higher cost of capital. We found that the industrial production volatility proved to be a significant driver of the discount rate. Expectations of future outcomes also drive risk concerns. Consequently. based on the assumption that the future will in some sense be similar to the past.68 3. and could drive the discount rate higher if governments chasing tax revenue punish investors.00 Min. Bullish investors are encouraged to compare their forecasts to the mean reverting assumptions employed in the HOLT estimates. and the 25th and 75th percentile values. The notion of risk appears to have been flipped on its head and mirrors investor enthusiasm for emerging markets in 2010.20 0. so caution is warranted.72 1. median and maximum values over the past decade.95 1. investors demand a rate of return on equities at least as much as the risk-free rate. Capital gains and dividends tax rates tested as significant drivers.

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _29 Figure 5 Enterprise value-weighted market-derived discount rates – by country Source: Credit Suisse HOLT. Gauging market attractiveness We have shown how the HOLT discount rate can be used to quantify risk appetite and indicate stock market attractiveness.1 2 2. We concluded the paper by commenting on today's discount rates for the G20 (plus Switzerland). which is the second test in the event of idiosyncratic issues. Today's yields indicate that developing and resource-rich markets are trading at relatively expensive prices. Bearing the first condition in mind. In the case of Russia. and then each country relative to itself. We investigated and quantified drivers of the discount rate. Argentina. developed markets look attractive in comparison.1 5. We translated those drivers into questions investors should consider when trying to understand the future trajectory of the discount rate. We estimate the ERP for key regions in Figure 6.6 2.1 Discount Rate (%) Brazil 10-year median DR Discount rate Cost of Equity (%) When using this chart. This prompts the question of whether equity investors will be compensated for the extra risk they are taking in developing markets. 17 January 2011 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 United States Mexico South Africa Argentina Indonesia Australia Japan China India Korea Hong Kong Turkey Germany Switzerland Canada France United Kingdom Saudi Arabia Russia 2. risk appetite can vary significantly! Today's US discount rate indicates an expensive market. “Is the valuation for this market rich?” The degree of alarm can be gauged from the country's behavior relative to itself over the past decade.1 0 1.7 6.1 2. it is recommended that you consider the absolute yield relative to the long-term discount rate thermometer. Mexico and Brazil lie below 5% and are trading at decade low yields. investors are particularly concerned about corporate governance and we believe this concern is reflected in the discount rate. and see that the ERP for developed markets is far more attractive than the ERP for developing markets.5 Japan Europe UK USA Emerging Italy APxJ Equity risk premium Risk free rate BBB 7–10 year yield . One could conclude that future growth and optimism are already embedded in their market expectations.3 1. Suffice to say. Contrarians might counter that developed markets are riskier but would benefit from reflecting on the wide gap in the ERP estimates. Results for the USA over the past 60 years give a long-term sense for risk appetite regimes and were used to estimate a marketimplied ERP time series. Figure 6 Market-implied ERP estimates for various regions Source: Credit Suisse HOLT 17 January 2011 10 8 6 6. Investors who believe these fears are overblown should view Russia as attractive value.1 2. while today's ERP for the USA indicates that it is attractive. Mature. Russia and Korea trade at high yields due to idiosyncratic risks but are presently trading at low yields relative to their respective histories.3 3. all countries below 5% should beg the question. They appear to be overbought unless investors believe our mean reverting forecasts for them are too pessimistic.8 4 6.

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. Credit Suisse Global Investment Returns Sourcebook 2011.2% Switzerland 3.0% Russia 3. Norway.6% Italy 1. These countries covered 89% of the global stock market in 1900. R Mehra (Ed. eight euro-currency area states (Belgium.6% Other 3.5% UK 30. Amsterdam: Elsevier 3.3% Germany 6. The upper chart reports. 2011. R. inflation.3% Other 16.8% Austria-Hungary 3. measured over the last decade. and full 111 years. Staunton. and Treasury bills. Ireland. E. Japan. and an analogous 13-country European equity index. 2002. and 83% of its market capitalization by the start of 2011.3% USA 19.4% Spain 1.2% Source: Elroy Dimson. E. Figure 2 Relative sizes of world stock markets. Marsh and M. Germany. three Asia-Pacific countries (Australia. Sweden. Switzerland. In the country pages that follow.9% Belgium 3. all with income reinvested. Bibliography and data sources 1.4% Germany 3..8% Netherlands 1. quarter-century. Staunton. 2008. P. Zurich: Credit Suisse Research Institute 4. Extensive additional information is available in the Credit Suisse Global Investment Returns Sourcebook 2011. France. R. Dimson. All equity indexes are weighted by market capitalization (or. Triumph of the Optimists. The country pages provide data for 19 countries. in years before capitalizations were available. Marsh and M. 2011.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_31 Guide to the country profiles The Yearbook’s global coverage The Yearbook contains annual returns on stocks.2% UK 8. bonds. Marsh and M.. the Netherlands. Finland. R. Figure 2 shows how they had changed by end-2010. The countries comprise two North American nations (Canada and the USA). P. and bills.5% Canada 1.. an analogous 18-country world ex-US equity index. which is available through London Business School. This 200-page reference book. for the last 111 years. Staunton. the Yearbook covered 89% of the world equity market in 1900 and 83% by end-2010. Marsh and M. and New Zealand). Morningstar Inc. The middle chart reports the annualized premium achieved by equities relative to bonds and to bills. Figure 1 shows the relative sizes of world equity markets at our base date of end-1899. there are three charts for each country or region. R. Paul Marsh and Mike Staunton. bonds. Dimson. the real value of an initial investment in equities. Credit Suisse Global Investment Returns Sourcebook 2011. Staunton. P. contains bibliographic information on the data sources for each country.1% France 3. all with index series that start in 1900. Italy. P. five European markets that are outside the euro area (Denmark. Dimson. The bottom chart compares the 111-year annualized real returns. We also compute bond indexes for the world. bills. and Spain). E. Figure 1 Individual markets Elroy Dimson. The latter are a 19country world equity index denominated in USD. listed alphabetically starting on the next page.) The Handbook of the Equity Risk Premium. and standard deviation of real returns for equities. E.1% The Credit Suisse Global Investment Returns Yearbook covers 22 countries and regions. As these pie charts show. and the UK). and followed by three broad regional groupings.9% Australia 3.0% USA 41. and one African market (South Africa).9% Japan 4. The worldwide equity premium: a smaller puzzle. with countries weighted by GDP. (the “DMS” data module) . Dimson. and currencies for 19 countries from 1900 to 2010.9% Other Yearbook 5.6% Other Yearbook 5. Paul Marsh and Mike Staunton London Business School Relative sizes of world stock markets. The underlying data are available through Morningstar Inc. half-century. by GDP). The Dimson-MarshStaunton Global Investment Returns Database. world ex-US and Europe. Markets that are not included in the Yearbook dataset are colored in black.4% Sweden 1. NJ: Princeton University Press 2. end-2010 Japan 8. long-term government bonds. end-1899 France 14. nominal returns.1% Canada 4.

2 2.a. For additional explanations of these figures. Commonwealth Bank of Australia.1 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 3.4 0.1 for bills.1 as compared to 4.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 7. Figure 3 shows that the long-term real return on Australian equities was an annualized 7.7% respectively. The Australian Securities Exchange (ASX) has its origins in six separate exchanges.9 for bonds and 2.4% as compared to bonds and bills. since 1900.7 5.9 2.862 1. prosperity.6 18. with a real return of 7.9 6. with income reinvested. and is home to the largest financial futures and options exchange in the AsiaPacific region.000 100 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 4.4% and 0. established as early as 1861 in Melbourne and 1871 in Sydney.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_32 Capital market returns for Australia Figure 1 shows that.5 3. But maybe Australians make their own luck: in 2011 the Heritage Foundation ranked Australia as the country with the highest economic freedom in the world. the real value of equities.6 5. Credit Suisse Global Investment Returns Sourcebook 2011.4% per year. Figure 2 shows that.1 3.9% and bills by 6.7 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. Australia Figure 1 The lucky country Australia is often described as “the Lucky Country” with reference to its natural resources.2 Source: Elroy Dimson. More than half the index is represented by banks (28%) and mining (23%). and distance from problems elsewhere in the world. .4 4. grew by a factor of 2862. well before the federation of the Australian colonies to form the Commonwealth of Australia in 1901. Paul Marsh and Mike Staunton.a. over the last 111 years.) Premium vs Bills (% p. while the largest stocks at the start of 2011 are BHP Billiton.4 11. The ASX is now the world’s sixth-largest stock exchange. Annualized performance from 1900 to 2010 10.5 3. which gave a real return of 1. Sydney is a major global financial center. weather.7 0 0. see page 31. Australia also has a significant government and corporate bond market. and Westpac.000 2. Australia has been the best-performing equity market over the 111 years since 1900.7% per year. equities beat bonds by 5. beaten only by a couple of city-states that also score highly.5 5.2 13.4 1. Whether it is down to luck or good economic management.

with income reinvested. and is the headquarters of the European Union. .7 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 1 0 5 3. The Brussels stock exchange was established in 1801 under French Napoleonic rule.9 for bonds and 0.9 0. see page 31.1 0 -2. specializing during the early 20th century in tramways and urban transport. Figure 2 shows that. but Belgium can also assert centrality. Belgium Figure 1 At the heart of Europe Lithuania claims to lie at the geographical heart of Europe.0 2.1 -5 -4.6% and bills by 2. Paul Marsh and Mike Staunton.0 Source: Elroy Dimson.0 12. grew by a factor of 16.2 5.0 5.1% and –0.a.7 for bills.3% respectively. The ravages of war and attendant high inflation rates are an important contributory factor to its poor long-run investment returns – Belgium has been one of the two worst-performing equity markets and the sixth worst performing bond market.5% as compared to bonds and bills.) Premium vs Bills (% p.2 1 .1 -1 0 2001 –201 0 1 986–201 0 1 –201 961 0 1 900–201 0 Premium vs Bonds (% p.6 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2.a.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_33 Capital market returns for Belgium Figure 1 shows that. more than half of the index was invested in just two companies: Anheuser-Busch (45%) and Delhaize (7%).6 2. It lies at the crossroads of Europe’s economic backbone and its key transport and trade corridors. Three large banks made up a majority of its market capitalization at start-2008.9% per year.) Figure 3 Returns and risk of major asset classes since 1900 25 23. Its importance has gradually declined. Belgium’s strategic location has been a mixed blessing.2 as compared to 0. Brussels rapidly grew into a major financial center.3 8. making it a major battleground in two world wars.1 -0. since 1900. For additional explanations of these figures. the real value of equities.0 8. and Euronext Brussels suffered badly during the recent banking crisis. At the start of 2011. Annualized performance from 1900 to 2010 100 10 16 1 0.9 2. Credit Suisse Global Investment Returns Sourcebook 2011. Figure 3 shows that the long-term real return on Belgium equities was an annualized 2. equities beat bonds by 2. In 2010. Belgium was ranked the most globalized of the 181 countries that are evaluated by the KOF Index of Globalization. which gave a real return of –0.7 0.5 -0. over the last 111 years. but the banking sector now represents only 6% of the index.

7 for bills. which gave a real return of 2. diamonds. It is also a major exporter of soft commodities. grew by a factor of 550. Credit Suisse Global Investment Returns Sourcebook 2011.7 3.6% respectively. equities beat bonds by 3.1% per year. and its economy is the tenth-largest.9% per year.4 4.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 9.2% per year.6 5. The real return on bonds has been 2. Given Canada’s natural endowment.7 3.) Premium vs Bills (% p. while its mines are leading producers of nickel.a. Figure 2 shows that. Paul Marsh and Mike Staunton. with income reinvested. The largest stocks are currently Royal Bank of Canada. Annualized performance from 1900 to 2010 1.7 17. uranium and lead.9 -5 -0. Toronto-Dominion Bank and Suncor Energy. especially grains and wheat.2 10. the real value of equities.7 4.1% of world capitalization.9 2. pulp and paper. For additional explanations of these figures.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_34 Capital market returns for Canada Figure 1 shows that.1% and 1.1 5. having the world’s second-largest oil reserves.2 4. Canada Figure 1 Resourceful country Canada is the world’s second-largest country by land mass (after Russia). .1 3. over the last 111 years. as well as lumber. see page 31.4 1. gold.0 for bonds and 5.7 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 3. while a further 33% is accounted for by financials. The Canadian equity market dates back to the opening of the Toronto Stock Exchange in 1861 and is the world’s fourth-largest.000 551 100 10 10.9% as compared to bonds and bills. Figure 3 shows that the long-term real return on Canadian equities was an annualized 5. since 1900.2 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. it is rated number one out of 110 countries monitored in the latest Country Brand Index. These figures are close to those for the United States. As a brand.9 as compared to 10. it is no surprise that oil and gas and mining stocks have a 38% weighting in its equity market.0 5.8 0 -0. Canadian equities have performed well over the long run.a. with a real return of 5.9 Source: Elroy Dimson.7% and bills by 4. accounting for 4.1 1. It is blessed with natural resources. Canada also has the world’s ninth-largest bond market.

grew by a factor of 247. The returns are taken from a study by Claus Parum.9 0 0.9 for bonds and 11. Figure 3 shows that the long-term real return on Danish equities was an annualized 5. is below the world return of 5. Denmark was ranked the happiest nation on earth. Annualized performance from 1900 to 2010 1.) Premium vs Bills (% p.0% and 2.9 0. which.000 248 100 27.9 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 3. Danske Banking. Switzerland.9 for bills. the real value of equities.7 7.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 5. equities beat bonds by 2. and Norway. For additional explanations of these figures. the highest among the Yearbook countries.a. it does not appear to spring from outstanding equity returns. over the last 111 years.a.1 3. . This is because our Danish bond returns.0 20.9 9. Since 1900.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_35 Capital market returns for Denmark Figure 1 shows that. see page 31.7 3.2 3. It has a high weighting in healthcare (51%) and industrials (19%). The Danish equity market is relatively small. Figure 2 shows that. closely followed by Sweden.2 Source: Elroy Dimson.6 as compared to 27. while respectable.0% and bills by 2.8 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.8% per year.3 6. Denmark Figure 1 Happiest nation In a 2011 meta-survey published by the National Bureau of Economic Research. In contrast.3% respectively. but can trace its roots back to the late 17th century.3 1.2 6. Credit Suisse Global Investment Returns Sourcebook 2011. rather than more thinly traded government bonds. Paul Marsh and Mike Staunton.0%. with income reinvested. The Copenhagen Stock Exchange was formally established in 1808. since 1900. which gave a real return of 3. Danish equities have given an annualized real return of 5. and AP Moller–Maersk. who felt it was more appropriate to use mortgage bonds.1 11.0 2.1% as compared to bonds and bills. and the largest stocks listed in Copenhagen are Novo-Nordisk.0 2.3 2.5%. unlike those for the other 18 countries. Danish bonds gave an annualized real return of 3. include an element of credit risk.9 10 11. Whatever the source of Danish happiness.1%.

4 -7.) Premium vs Bills (% p. the world’s largest manufacturer of mobile telephones. Finland is the only Nordic state in the euro currency area. with income reinvested. the real value of equities. The Finns have transformed their country from a farm and forest-based community to a diversified industrial economy operating on free-market principles. over the last 111 years. Forestry.6 5.8 for bonds and 0.9 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. the Helsinki exchange has been part of the OMX family of Nordic markets.a. It is home to Nokia.9% per year. A member of the European Union since 1995.2% and –0. Finland Figure 1 East meets West With its proximity to the Baltic and Russia. provides a secondary occupation for the rural population.2 as compared to 0. Sampo. Per capita income is among the highest in Western Europe. Finnish securities were initially traded over-the-counter or overseas. .3 6. see page 31.6% and bills by 5. quality of life. This country of snow. since 1900.8 13. swamps and forests – one of Europe’s most sparsely populated nations – was part of the Kingdom of Sweden until sovereignty transferred in 1809 to the Russian Empire. and Finland is a highly concentrated stock market. Credit Suisse Global Investment Returns Sourcebook 2011. Finland is a meeting place for Eastern and Western European cultures.7 11. equities beat bonds by 5. Since 2003. economic competitiveness. Finland became an independent country. and political environment of 100 countries. health. Figure 3 shows that the long-term real return on Finnish equities was an annualized 5. and Fortum. an important export earner. The OECD ranks Finnish schooling as the best in the world.6 5.4%. Annualized performance from 1900 to 2010 1.2 -0. which has been rated the most valuable global brand outside the USA.000 334 100 10 1 0. For additional explanations of these figures.5 Source: Elroy Dimson. grew by a factor of 334. Nokia represented 72% of the value-weighted HEX All Shares Index.6 0 -4.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_36 Capital market returns for Finland Figure 1 shows that. Figure 2 shows that. In 1917. as compared to bonds and bills. which gave a real return of –0.3 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 13. Paul Marsh and Mike Staunton.8 4.6 for bills. Newsweek magazine ranks Finland as the best country to live in the whole world in its August 2010 survey of education.1 5.a.6 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 4. The largest Finnish companies are currently Nokia (31% of the market).4 -0.1 7. At its peak.8 0.9 5.1 6. Finland excels in high-tech exports. and trading began at the Helsinki Stock Exchange in 1912.5% respectively.) Figure 3 Returns and risk of major asset classes since 1900 30.

It has had the third-highest inflation.6 3. Credit Suisse Global Investment Returns Sourcebook 2011.5 as compared to 0.) Premium vs Bills (% p. As Kindelberger.2 9.8 0 -2.5 Source: Elroy Dimson.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 3.04 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 3.1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 0.0 3.0 0. “London was a world financial center. After the Franco-Prussian War in 1870. especially.8 13.a. and BNP– Paribas. being a founder member of the European Union and the euro.2% and bills by 6.8 for bonds and 0. France Figure 1 European center Paris and London competed vigorously as financial centers in the 19th century.9 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.1% and –2. Figure 3 shows that the long-term real return on French equities was an annualized 3. . French equities have achieved mid-ranking returns. in loans to Russia and the Mediterranean region.8% respectively. see page 31.1 -0.” Paris has continued to be an important financial center while France has remained at the center of Europe. At the start of 2011.0% per year.04 for bills. as compared to bonds and bills. Long-run French asset returns have been disappointing. equities beat bonds by 3. But Paris remained important. 15th for bonds and 18th for bills. with income reinvested.0 -0. Since 1950. hence the poor fixed income returns. over the last 111 years.1 4.a. Figure 2 shows that. grew by a factor of 28. Annualized performance from 1900 to 2010 100 28 10 1 0.8 0 0.2 6.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_37 Capital market returns for France Figure 1 shows that. London achieved domination. ranked fifth in the world. France’s largest listed companies were Total. Paris was a European financial center. including the Ottoman Empire. the real value of equities. to its later disadvantage. the inflationary episodes and poor performance date back to the first half of the 20th century and are linked to the world wars. France ranks 16th out of the 19 Yearbook countries for equity performance. the economic historian put it.0 10. France is Europe’s second-largest economy.1%. However.6 -5 -6. Paul Marsh and Mike Staunton. since 1900. For additional explanations of these figures.1 -2. It has the largest equity market in Continental Europe. which gave a real return of –0.6 23.5 7. Sanofi–Aventis. and the fourth-largest bond market in the world.

with weightings of 20% in industrials. the real value of equities. and 19% in basic materials.1 5.” Meanwhile. over the last 111 years.094% in real terms from 1949 to 1959.4% respectively. which gave a real return of –1. equities beat bonds by 5. Daimler. inflation hit 209 billion percent.0 -0.12 0. it has enjoyed the world’s lowest inflation rate. grew by a factor of 28. Paul Marsh and Mike Staunton. The German stock market retains its bias towards manufacturing.1 -0.3 15. Figure 3 shows that the long-term real return on German equities was an annualized 3.9% per year.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_38 Capital market returns for Germany Figure 1 shows that. In the hyperinflation of 1922–23.5 13. In the early stages of its “economic miracle. Germany Figure 1 Locomotive of Europe German capital market history changed radically after World War II.1% as compared to bonds and bills. . From 1949 to date.ON. The largest stocks are Siemens. it built a reputation for fiscal and monetary prudence. its strongest currency (now the euro).8 5. BASF. Today. while bonds fell by 91%. For further explanations of these figures. Credit Suisse Global Investment Returns Sourcebook 2011. while its bond market is the world’s sixth-largest. which dates back to 1685.6 -4.” German equities rose by 4. Formerly the world’s top exporter.9% and –2. equities fell by 88% in real terms. it has now been overtaken by China.4 1.2 Source: Elroy Dimson. In World War II and its immediate aftermath. Figure 2 shows that.1 -1. Germany rapidly became known as the “locomotive of Europe.4% and bills by 5. and holders of fixed income securities were wiped out.07 0 0.) Figure 3 Returns and risk of major asset classes since 1900 32.8 2.12 for bonds and 0. Annualized performance from 1900 to 2010 100 28 10 1 0.4 8.9 0 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.) Premium vs Bills (% p.a. since 1900.2 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 3. ranks seventh in the world by size.3 as compared to 0. German equities lost two-thirds of their value in World War I. see page 31.3 2. Its stock market. and E.1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 2. In the first half of the 20th century.9 -2. We exclude 1922–23 for all series except real equity returns. 19% in consumer goods. and the second best-performing bond market. with income reinvested.3 -1. There was then a remarkable transformation. Germany is Europe’s largest economy.a.07 for bills.

since 1900. which gave a real return of 0. Ireland had become the world’s fifth-richest country in terms of GDP per capita.2 for bills. Over the period 1987–2006.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 14. It switched its currency from the punt to the euro in January 2002.4 3. Ireland now needs to be saved from being a captive of the economic system.a. The captive tiger now has a smaller bite. and all investment returns reflect the start-2002 currency conversion factor.0 6. but by the beginning of 2011 they represented only 6% of the index. At that date. and during the 1950s the country experienced large-scale emigration. the real value of equities.0 -5 -6. stock exchanges had existed from 1793 in Dublin and Cork. with income reinvested. Figure 3 shows that the long-term real return on Irish equities was an annualized 3. The financial crisis changed that.8 as compared to 2. economic growth and stock market performance were weak.7 8. over the last 111 years. Too much of the market boom was based on real estate. Ireland had the second-highest real equity return of any Yearbook country.7% respectively.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_39 Capital market returns for Ireland Figure 1 shows that. By 2007.9 0. and Irish stocks are now worth only one-third of their value at the end of 2006. Ireland joined the European Union in 1973.2 Source: Elroy Dimson.2 5.9 10 5 3. Credit Suisse Global Investment Returns Sourcebook 2011. By the 1990s and early 2000s.2 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 0.2 -6.8 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 0.9 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. In the period following independence.5 0 2.5 4. free at last after 700 years of Norman and later British involvement and control.6 2. see page 31.8% as compared to bonds and bills. For additional explanations of these figures. and sadly. Ireland Figure 1 Born free Ireland was born as an independent country in 1922 as the Irish Free State.0% per year. In order to monitor Irish stocks from 1900. the second-richest in the EU. we constructed an index for Ireland based on stocks traded on these two exchanges. and was experiencing net immigration.9% and bills by 3. and the country is now facing hardship. the Irish market had a 57% weighting in financials. it has shrunk since 2006.000 100 60 10 2.) Premium vs Bills (% p. . The country is one of the smallest Yearbook markets.6 for bonds and 2. financials and leverage. Ireland experienced great economic success and became known as the Celtic Tiger. Figure 2 shows that.7 23. Annualized performance from 1900 to 2010 1. Just as the Born Free Foundation aims to free tigers from being held captive in zoos. Paul Marsh and Mike Staunton. Though Ireland gained its independence in 1922. and from 1987 the economy improved.2 5. grew by a factor of 59.9% and 0.a.9 3. equities beat bonds by 2.1 2.

Paul Marsh and Mike Staunton. These bankers were known as Lombards. Unicredito.7 14.7% and bills by 5. Indeed.1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 0.) Figure 3 Returns and risk of major asset classes since 1900 29.6 Source: Elroy Dimson.a. and the highest inflation rate and weakest currency.1 as compared to 0.4 3. since 1900.7 5. with financials still accounting for 36% of the Italian equity market.2 for bonds and 0. including the Medici. Apart from Germany.6% respectively. and the largest stocks traded on the Milan Stock Exchange are Eni. the real value of equities.) Premium vs Bills (% p.8% per year. and Enel.2 0 0. North Italian bankers." the bench on which the Lombards used to sit to transact their business. Since 1900. dominated lending and trade financing throughout Europe in the Middle Ages.7 -5 -5. Figure 3 shows that the long-term real return on Italian equities was an annualized 2.7 4. grew by a factor of 9. Italy’s stock market is the world’s 17th largest.8 0 -3.02 for bills.0 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2.1 10. Oil and gas accounts for a further 23%. over the last 111 years.7% and –3. with its post-World War I and post-World War II hyperinflations. see page 31. the annualized real return from equities has been 2. For additional explanations of these figures.6 6. the lowest return out of 19 countries.a.0 -1. Italy can claim a key role in the early development of modern banking. . Italy retains a large banking sector to this day.0%.9 0.5 -3. Annualized performance from 1900 to 2010 100 10 9 1 0. with income reinvested.8 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. which generated annualized real returns of –1. equities beat bonds by 3. Today.3 -1. Figure 2 shows that.02 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 0. Italy has experienced the second-worst real bond and worst bill returns of any Yearbook country. Credit Suisse Global Investment Returns Sourcebook 2011. banking takes its name from the Italian word “banca.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_40 Capital market returns for Italy Figure 1 shows that. Italy has experienced some of the poorest asset returns of any Yearbook country. Italy Figure 1 Banking innovators While banking can trace its roots back to Biblical times. but its highly developed bond market is the world’s third-largest. Sadly.5 11.2 -7. a name that was then synonymous with Italians.0% as compared to bonds and bills.

1% and –1. Credit Suisse Global Investment Returns Sourcebook 2011.3 0. with the world’s second-largest GDP.1 5.565%.7 -1.0 2. Japan Figure 1 Birthplace of futures Japan has a long heritage in financial markets. From 1990 to the start of 2009. For additional explanations of these figures. and this is reflected in the composition of its equity market. Figure 3 shows that the long-term real return on Japanese equities was an annualized 3. grew by a factor of 63.0 20. Japan’s “economic miracle” began and equities gave a real return of 1.9 as compared to 0.9 11.a.) Premium vs Bills (% p. which created its stock exchange in 1878. Meanwhile. the real value of equities.12 64 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 5. Osaka was to become the leading derivatives exchange in Japan (and the world’s largest futures market in 1990 and 1991) while the Tokyo stock exchange.6 0 -2. Trading in rice futures had been initiated around 1730 in Osaka. From 1900 to 1939. equities beat bonds by 5.1 0 0.0% and bills by 5. with income reinvested. this will not form the blueprint for other countries that are hoping to emerge from their own financial crises.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_41 Capital market returns for Japan Figure 1 shows that.3 for bonds and 0. machinery and robotics. since 1900. Real estate values were also riding high and it was alleged that the grounds of the Imperial palace in Tokyo were worth more than the entire State of California. over the last 111 years. With one or two setbacks. see page 31.8 25 20 15 10 5 3.4 -5 -5. was to become the leading market for spot trading.1 -1.9% respectively. Japan suffered a prolonged period of stagnation. banking crises and deflation. Then the bubble burst. Hopefully. It is a world leader in technology.12 for bills.4 5. But World War II was disastrous and Japanese stocks lost 96% of their real value. Paul Marsh and Mike Staunton. Japan was the worst-performing stock market. . the Japanese equity market was the largest in the world.1 Source: Elroy Dimson. From 1949 to 1959. At the start of 2011 its capital value is still only one-third of its value at the beginning of the 1990s.8 5.8% as compared to bonds and bills. with a 40% weighting in the world index versus 32% for the USA. also founded in 1878. equities kept rising for another 30 years.9% per year.) Figure 3 Returns and risk of major asset classes since 1900 29. By the start of the 1990s.a. Despite the fallout from the bursting of the asset bubble.8 0 -5 -1.2 -5. which gave a real return of –1. Its weighting in the world index fell from 40% to 8%.3 -1. Japan was the world’s secondbest equity performer.9 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.01 1900 0.9 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 13. automobiles. Annualized performance from 1900 to 2010 1. electronics. Japan remains a major economic power.000 100 10 1 0 0. It has the world’s second-largest equity market as well as its secondbiggest bond market. Figure 2 shows that.

The Amsterdam market.) Premium vs Bills (% p.0 1. which is the world’s 12th-largest.0 21.4% and 0.0 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 8.2% per year.5 3. Paul Marsh and Mike Staunton. Dutch equities have generated a mid-ranking real return of 5. The Amsterdam Exchange continues to prosper today as part of Euronext. was the world’s main center of stock trading in the 17th and 18th centuries. The Netherlands has a prosperous open economy. .4 0. grew by a factor of 218. The largest energy company in the world.2 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.1 1.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 5. ING Group. Figure 1 Netherlands Exchange pioneer Although some forms of stock trading occurred in Roman times.2 for bills. Over the years.7 3. organized trading did not take place until transferable securities appeared in the 17th century. bubbles and other features of modern exchanges. equities beat bonds by 3. Annualized performance from 1900 to 2010 1.5 4. Credit Suisse Global Investment Returns Sourcebook 2011.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_42 Capital market returns for the Netherlands Figure 1 shows that. bears. Figure 3 shows that the long-term real return on Dutch equities was an annualized 5. panics. now has its primary listing in London and a secondary listing in Amsterdam.4 3.8 Source: Elroy Dimson.8 for bonds and 2.7 4. A book written in 1688 by a Spaniard living in Amsterdam (appropriately entitled Confusion de Confusiones) describes the amazingly diverse tactics used by investors. The Netherlands has traditionally been a low inflation country and. including Unilever. has enjoyed the second-lowest inflation rate among the Yearbook countries (after Switzerland).0 as compared to 4. since 1900.2 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 4.0% as compared to bonds and bills.000 218 100 10 4. But the Amsterdam Exchange still hosts more than its share of major multinationals. Royal Dutch Shell.0% per year. which started in 1611. and Philips. ArcelorMittal. Even though only one stock was traded – the Dutch East India Company – they had bulls.a.5% and bills by 4. over the last 111 years.0 -5 -7. For additional explanations of these figures. The Netherlands also has a significant bond market. the real value of equities.a. which gave a real return of 1. see page 31. Figure 2 shows that.6 9.8 2.4 5.2 0 -4.7% respectively.3 4. since 1900. with income reinvested.

the real value of equities.3 for bills.5 -5 2.4 as compared to 8. Traditionally.7 -2. Over the last two decades.1 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. free market economy. over the last 111 years.7% respectively. The largest firms traded on the exchange are Fletcher Building and Telecom Corporation of New Zealand.2 -4. New Zealand Figure 1 Purity and integrity For a decade. New Zealand has evolved into a more industrialized.7 19.8% as compared to bonds and bills.1 0 1.7 5. It was dependent on concessionary access to British markets until UK accession to the European Union. and freedom to run businesses. Figure 2 shows that. since 1900. which gave a real return of 2. New Zealand's economy was built upon on a few primary products. It competes globally as an export-led nation through efficient ports.0 4.a.8 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 5. good governance. openness.8% and bills by 4.8 for bonds and 6.3 3. In 2003. Figure 3 shows that the long-term real return on New Zealand equities was an annualized 5.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9. The New Zealand Exchange traces its roots to the Gold Rush of the 1870s. airline services. For additional explanations of these figures. equities beat bonds by 3. According to Transparency International.000 533 100 10 8.7 Source: Elroy Dimson.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_43 Capital market returns for New Zealand Figure 1 shows that. Annualized performance from 1900 to 2010 1. the Exchange demutualized. Credit Suisse Global Investment Returns Sourcebook 2011.2 2. see page 31. with income reinvested. The Global Peace Index for 2011 rates the country as the most peaceful in the world. The British colony of New Zealand became an independent dominion in 1907. meat. the regional stock markets merged to form the New Zealand Stock Exchange. The Wall Street Journal ranks New Zealand as the best in the world for business freedom.a.5 9.0 1. and officially became the New Zealand Exchange Limited. notably wool.0% and 1.8 6. in 2010 New Zealand was perceived as the least corrupt country in the world.8 4. In 1974.1% per year. and submarine fiberoptic communications. But the country also prides itself on honesty. grew by a factor of 533. .) Premium vs Bills (% p.8 5.8 2.3 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 1. Paul Marsh and Mike Staunton. and dairy products. New Zealand has been promoting itself to the world as “100% pure” and Forbes calls this marketing drive one of the world's top ten travel campaigns.

which gave a real return of 1. on average. In the 1990s.a. education and standard of living. the real value of equities.2 7.9 2.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4. commodities and currencies.0% per year.000 100 97 10 6.2 8. since 1900. The largest OSE stocks are Statoil. see page 31. this extended to trading in stocks and shares.6 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 3.6 for bills. with income reinvested.4 12. Figure 2 shows that. The exchange now forms part of the OMX grouping of Scandinavian exchanges. The population of 4.8 million enjoys the second-largest GDP per capita in the world and lives under a constitutional monarchy outside the Eurozone (a distinction shared with the UK).8 3. through its Human Development Index. the Government established its petroleum fund to invest the surplus wealth from oil revenues.7% and 1.1 5. This has grown to become the largest fund in Europe and the second-largest in the world.6 for bonds and 3. Annualized performance from 1900 to 2010 1.) Premium vs Bills (% p.a. For additional explanations of these figures.1 0 5.5 3. over the last 111 years. with a market value above USD 0.7 1. Figure 3 shows that the long-term real return on Norwegian equities was an annualized 4. The United Nations.5 trillion. Credit Suisse Global Investment Returns Sourcebook 2011. . Norway Figure 1 Nordic oil kingdom Norway is a very small country (ranked 115th by population and 61st by land area) surrounded by large natural resources that make it the world’s fourth-largest oil exporter and the second-largest exporter of fish. grew by a factor of 97.5% and bills by 3.5 2. Later. The fund invests predominantly in equities and. Paul Marsh and Mike Staunton.9 1.5 4.6 3.2 as compared to 6. The Oslo stock exchange (OSE) was founded as Christiania Bors in 1819 for auctioning ships.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_44 Capital market returns for Norway Figure 1 shows that.0 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. ranks Norway the best country in the world for life expectancy.9 27.2 Standard deviation Source: Elroy Dimson.0 3. equities beat bonds by 2.2% as compared to bonds and bills. DnB NOR. and Telenor.2 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills 1. it owns more than one percent of every listed company in the world.2% respectively.

are well over a quarter of the JSE’s market capitalization.000 2.a. Resource stocks. generating real equity returns of 7.8 6. Gold.000 100 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 7. the real value of equities. Annualized performance from 1900 to 2010 10.8 1. with a sophisticated financial structure. Over the years since 1900. the second-highest return among the Yearbook countries.) Premium vs Bills (% p.0 3.0 for bonds and 3.5% and bills by 6.8% and 1. Back in 1900. however. The largest JSE stocks are MTN. For additional explanations of these figures.2% per year.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 7.5 6. grew by a factor of 2524. as well as vital deposits of diamonds.8 3. with income reinvested. Today. .3% as compared to bonds and bills. it has not yet emerged. once the keystone of South Africa’s economy.525 1. According to index compilers. vanadium and coal. and it today ranks as the fifth-largest emerging market. South Africa.5 5.5 6.6 Source: Elroy Dimson. Paul Marsh and Mike Staunton. South Africa Figure 1 Golden opportunity The discovery of diamonds at Kimberley in 1870 and the Witwatersrand gold rush of 1886 had a profound impact on South Africa’s subsequent history.0 12.8 5 5.9 6. which gave a real return of 1. Figure 3 shows that the long-term real return on South African equities was an annualized 7. equities beat bonds by 5.2 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. the Johannesburg Stock Exchange (JSE) opened in 1887. since 1900. has declined in importance as the economy has diversified.3 1. South Africa is the largest economy in Africa. over the last 111 years.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_45 Capital market returns for South Africa Figure 1 shows that.3% per year. 75% of its chrome and 41% of its gold. 80% of its manganese. the South African equity market has been one of the world’s most successful.2 for bills.2 22. The 1886 gold rush led to many mining and financing companies opening up.2 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 7. and Standard Bank.6 10. Figure 2 shows that. and to cater for their needs. Credit Suisse Global Investment Returns Sourcebook 2011.a. Today. Sasol.6 as compared to 7. together with several other Yearbook countries.4 6.0 6. South Africa has 90% of the world’s platinum.9 0 1.0% respectively. would have been deemed an emerging market. see page 31.

.2 11.6% as compared to bonds and bills.1 for bonds and 1. Banco Santander.3 0. The modern style of Spanish bullfighting is described as daring and revolutionary.3 7. over the last 111 years. heightened by Spain’s dependence on imports for 70% of its energy needs. and that is an apt description of real equity returns over the century.3% and bills by 3. Spain has a visibility and influence that extends way beyond its Southern European borders.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9.a. since 1900.3% and 0. The major Spanish companies retain strong presences in Latin America combined with increasing strength in banking and infrastructure across Europe. and BBVA.1 2.) Premium vs Bills (% p.9 0 1. Hindi and English.7 3.2 6. see page 31. For additional explanations of these figures. equities beat bonds by 2.2% per year. helped by strong economic growth since the 1980s. grew by a factor of 48.a.3 Source: Elroy Dimson. Figure 2 shows that. Annualized performance from 1900 to 2010 100 49 10 4.3 3. the 1930s and 1970s saw the very worst returns among our countries. the real value of equities. Spanish stocks lost much of their real value over the period of the civil war during 1936–39. Paul Marsh and Mike Staunton. The largest stocks are Telefonica.5 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 2.4 4. Partly for this reason.9 22.7 as compared to 4. and has the fourth-largest number of native speakers after Chinese.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_46 Capital market returns for Spain Figure 1 shows that.1 1 1. Though Spain stayed on the sidelines during the two world wars.6 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 1.3% respectively. Spain Figure 1 Key to Latin America Spanish is the most widely spoken international language after English. with income reinvested. The Madrid Stock Exchange was founded in 1831 and it is now the 15th largest in the world.3 4. while the return to democracy in the 1970s coincided with the quadrupling of oil prices. While the 1960s and 1980s saw Spanish real equity returns enjoying a bull market and ranked second in the world.6 5 3.2 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.6 6. and carries weight throughout Latin America. which gave a real return of 1. Figure 3 shows that the long-term real return on Spanish equities was an annualized 3.8 5. Credit Suisse Global Investment Returns Sourcebook 2011.5 for bills.

it would be for its achievement as the only country to have real returns for equities.a. current Nobel prize winners will rue the instruction to invest in safe securities as the real return on bonds was only 2. Figure 3 shows that the long-term real return on Swedish equities was an annualized 6. see page 31. Real Swedish equity returns have been supported by a policy of neutrality through two world wars.9% per year.8 4. and the benefits of resource wealth and the development. .8 22. with income reinvested. Had the capital been invested in domestic equities.6 for bonds and 8. in the 1980s. Australia and South Africa. Were Sweden to win a Nobel prize for its investment returns. The Stockholm stock exchange was founded in 1863 and is the primary securities exchange of the Nordic countries. the winners would have enjoyed immense fortune as well as fame.1 10 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 0.000 903 100 14. For additional explanations of these figures.1 6. The largest SSE stocks are Nordea Bank.9 3. Annualized performance from 1900 to 2010 1. which gave a real return of 2. equities beat bonds by 3. Despite the high rankings for real bond and bill returns.) Premium vs Bills (% p.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 6.4 as compared to 14.5 6.9 Source: Elroy Dimson.1 3.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_47 Capital market returns for Sweden Figure 1 shows that.3 0 -5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. behind the two highestranked countries. grew by a factor of 903. over the last 111 years.3 2. Overall. Credit Suisse Global Investment Returns Sourcebook 2011. and Svenska Handelsbank. Since 1998. of industrial holding companies.4 10.a.9% respectively. Ericsson.4% per year.3% per year. they have returned 6.6 8. the real value of equities.4% and 1. and that on bills only 1.3% per year. bonds and bills all ranked in the top three. instructing that the capital be invested in safe securities. Figure 2 shows that. since 1900.1 5. Paul Marsh and Mike Staunton.3 2.9 4.9 12. Sweden Figure 1 Nobel prize returns Alfred Nobel bequeathed 94% of his total assets to establish and endow the five Nobel Prizes (first awarded in 1901).1 6.3% as compared to bonds and bills.8% and bills by 4.1 for bills.4 1. has been part of the OMX grouping.8 6.

with income reinvested. Credit Suisse Global Investment Returns Sourcebook 2011.0 as compared to 10. equities beat bonds by 2. Paul Marsh and Mike Staunton.8% respectively. Swiss equities have achieved a mid-ranking real return of 4.1 2.4 0 -4.a. sound economic policy. .1% of the world’s population and 0. since 1900. Meanwhile.4 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.5 3. Since 1900.0% of total world value.8 2.2 -5 -0. which gave a real return of 2. The Swiss stock market traces its origins to exchanges in Geneva (1850).2 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 2.8 Source: Elroy Dimson. Annualized performance from 1900 to 2010 1. Novartis and Roche. Zurich (1873) and Basel (1876). and private banking has been a major Swiss competence for over 300 years.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_48 Capital market returns for Switzerland Figure 1 shows that.1 3. Switzerland has also enjoyed the world’s lowest inflation rate: just 2.1 2.4 for bills. the Swiss franc has been the world’s strongest currency.4% per year. while Switzerland has been one of the world’s three best-performing government bond markets.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4.6 2.a. Swiss neutrality.3 6. In the Global Competitiveness Report 2010–2011.1% and 0.1%. grew by a factor of 100.1% and bills by 3.1 4.6 4.008% of its land mass.1 for bonds and 2. close to 30% of all cross-border private assets invested worldwide are managed in Switzerland.3% per year since 1900. Today. It is now the world’s eighth-largest equity market. over the last 111 years.) Premium vs Bills (% p.0 19. the real value of equities. Switzerland punches well above its weight financially and wins several gold medals in the global financial stakes. For additional explanations of these figures. with an annualized real return of 2.2% as compared to bonds and bills. Figure 2 shows that. of course. Switzerland is top ranked in the world. see page 31.1 0.4 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 4.000 100 100 10 10. accounting for 3. Switzerland Figure 1 Traditional safe haven For a small country with just 0. one of the world’s most important banking centers.8 9.1 5.2%. Switzerland is. Figure 3 shows that the long-term real return on Swiss equities was an annualized 4. low inflation and a strong currency have all bolstered the country’s reputation as a safe haven. Switzerland’s listed companies include world leaders such as Nestle.

0 0 -1.a.9 4. see page 31.4% and 1.3% as compared to bonds and bills. Annualized performance from 1900 to 2010 1.6 for bonds and 3.) Premium vs Bills (% p. Figure 2 shows that.4 as compared to 4. Credit Suisse Global Investment Returns Sourcebook 2011. and three-quarters of Europe’s hedge fund assets. More than three-quarters of Eurobond deals are originated and executed in London.5 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 5.0 6.0% respectively. which gave a real return of 1. managing almost half of Europe’s institutional equity capital. Figure 3 shows that the long-term real return on UK equities was an annualized 5. is the global. over the last 111 years. London is ranked as the top financial centre in the Global Financial Centres Index. and justifies its claim to be the world’s leading international financial center.4 5. This mostly took place in City of London coffee houses until the London Stock Exchange was formally established in 1801. cross-border nature of much of its business. Worldwide Centres of Commerce Index. For additional explanations of these figures.000 317 100 10 4. It is the world’s banking center. Early in the 20th century.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9. The London foreign exchange market is the largest in the world.1 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 1. and London was the world’s leading financial center. shipping.3% per year. and many other services.9% and bills by 4. More than a third of the workld’s swap transactions and more than a quarter of global foreign exchange transactions take place in London. By 1900.0 5.4 1. and Forbes’ ranking of powerful cities. with income reinvested.1 3. Paul Marsh and Mike Staunton. Today. .6 3. grew by a factor of 317.1 for bills.4 13. London is the world’s largest fund management center.4 3.7 20. equities beat bonds by 3. both New York and Tokyo are larger than London as financial centers.5 3. which is also a major center for commodities trading. United Kingdom Figure 1 Global center Organized stock trading in the UK dates from 1698. What continues to set London apart. and nowadays. with 550 international banks and 170 global securities firms having offices in London.3 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.a. specializing in global and cross-border finance.3 1. and eighth-largest bond market. the US equity market overtook the UK. since 1900.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_49 Capital market returns for the United Kingdom Figure 1 shows that. the real value of equities. third-largest insurance market. and London has the world’s third-largest stock market.4 4.0 Source: Elroy Dimson.3 -5 -0. the UK equity market was the largest in the world.

0% respectively. most of the long-run evidence cited on historical asset returns drew almost exclusively on the US experience. military. and economic power. That is why this Yearbook focuses on global returns.3 10. it became the world’s sole superpower.5 2.8 3.4 4.8%. Thus.5 2. The New York Stock Exchange traces its origins back to 1792.3 0 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. or of future equity returns for the USA itself.9 20. respectively.7 Source: Elroy Dimson. Since 1900. At that time. There is an obvious danger of placing too much reliance on the excellent long run past performance of US stocks. which gave a real return of 1. United States Figure 1 Financial superpower In the 20th century.9 -5 0. see page 31. Its stock market accounts for 41% of total world value.9 for bills. the real value of equities.a. The USA is also a financial superpower.000 851 100 10 7.) Premium vs Bills (% p. and the dollar is the world’s reserve currency. After the fall of communism.0 4. grew by a factor of 850. the United States rapidly became the world’s foremost political. its closest rival. over the last 111 years. the USA has gone from zero to a 41% share of the world’s equity markets. It has the world’s largest economy. with income reinvested. The USA also has the world’s largest bond market. Paul Marsh and Mike Staunton. For additional explanations of these figures.3 -3. since 1900. US financial markets are also the best documented in the world and.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_50 Capital market returns for the United States Figure 1 shows that.9 5. equities beat bonds by 4. in just a little over 200 years. US equities and US bonds have given real returns of 6. respectively.a.2 4. Credit Suisse Global Investment Returns Sourcebook 2011.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 9. . rather than just those from the USA. Investors can gain a misleading view of equity returns elsewhere. Figure 2 shows that.6 4.3% and 1.3% per year.3 1.5 for bonds and 2.7 as compared to 7.3% as compared to bonds and bills. Extrapolating from such a successful market can lead to “success” bias.8 1. until recently.8% and 1.4% and bills by 5.9 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 0. Annualized performance from 1900 to 2010 1. which is over five times as large as Japan.4 5. the Dutch and UK stock markets were already nearly 200 and 100 years old.4 5 0 -5 Real return (%) Equities Nominal return (%) Bonds Bills Standard deviation 6. Figure 3 shows that the long-term real return on US equities was an annualized 6.

0% respectively.7 Source: Elroy Dimson. since 1900. We have therefore created a 19-country world equity index denominated in a common currency. These indexes represent the long-run returns on a globally diversified portfolio from the perspective of an investor in a given country. Over the 111 years from 1900 to 2011. with income reinvested.2 4.5 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. with each country weighted by GDP.4% per year for the average country and 20.9 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 4.1 2. over the last 111 years.6 5. The charts opposite show the returns for a US global investor. grew by a factor of 374. equities beat bonds by 3. by its GDP. or in years before capitalizations were available. see page 31.0 -5 1. Figure 2 shows that. which gave a real return of 1.8 as compared to 6.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_51 Capital market returns for World (in USD) Figure 1 shows that. Credit Suisse Global Investment Returns Sourcebook 2011.5% per year. We also compute a 19-country world bond index.6% and 1.7% per year.9 for US bills.7 10.0 3. real returns are measured relative to US inflation.5 0 -4. World Figure 1 Globally diversified It is interesting to see how the 19 Yearbook countries have performed in aggregate over the long run. and 1. Paul Marsh and Mike Staunton.5 -0. For additional explanations of these figures.3% per year for the USA. the real value of equities. The world indexes are expressed in US dollars.a. The risk reduction achieved through global diversification remains one of the last “free lunches” available to investors.4 4.5% as compared to bonds and US bills.5% per year for equities. This compares with 23.8% and US bills by 4.8 1.1 for bonds and 2.000 375 100 10 6.8 4.5 1. Annualized performance from 1900 to 2010 1.7 3.6 1. in which each country is weighted by its starting-year equity market capitalization.6% per year for bonds.) Premium vs US Bills (% p. and the equity premium versus bills is measured relative to US treasury bills. Figure 1 shows that the real return on the world index was 5.9 17.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 8. Figure 3 shows that the long-term real return on World equities was an annualized 5. It also shows that the world equity index had a volatility of 17.0 4.a. .

2 5.9 for US bills. although the USA has not been a massive outlier. Although we are excluding just one out of 19 countries. Paul Marsh and Mike Staunton.a.) Premium vs US Bills (% p.8 for bonds and 2.2 20.7 14.a. This suggests that.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 8. the USA accounts for roughly half the total equity market capitalization of our 19 countries.2 1. .1 3. so the 18-country world ex-US equity index represents approximately half the total value of the world index.2% and 1. We noted above that. with income reinvested. which gave a real return of 1.8 4. we also construct two world indexes that exclude the USA. Credit Suisse Global Investment Returns Sourcebook 2011. see page 31.7 as compared to 3.0% as compared to bonds and US bills.2 3. We argued that focusing on such a successful economy can lead to “success” bias.0% per year.8 2. the real value of equities. over the last 111 years. grew by a factor of 234. Investors can gain a misleading view of equity returns elsewhere.9 0 -3. For additional explanations of these figures.3% per year below that for the USA. equities beat bonds by 3.8% and US bills by 4. the real return on the world ex-US equity index was 5.4 Source: Elroy Dimson. using exactly the same principles. since 1900.5 4. The charts opposite confirm this concern. World ex-US Figure 1 Rest of the world In addition to the two world indexes.0 4. until recently. Figure 2 shows that. from the perspective of a US-based international investor.5 4.9 4.2 0.000 235 100 10 3.9 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 2. or of future equity returns for the USA itself.2 -5 -1.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_52 Capital market returns for World ex-US (in USD) Figure 1 shows that.0% per year. it is nevertheless important to look at global returns. Annualized performance from 1900 to 2010 1. most of the longrun evidence cited on historical asset returns drew almost exclusively on the US experience.0 1.0% respectively. rather than just focusing on the USA. They show that. Figure 3 shows that the long-term real return on World ex-US equities was an annualized 5.0 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p. which is 1.

and from outside the EU. the Netherlands and Spain) and five European markets that are outside the euro area (Denmark. see page 31.5% for the world index. They comprise eight euro currency area states (Belgium. Figure 2 shows that.2 1. compared with our world index.5 3.8 0 -5 Real return (%) Equities Nominal return (%) Bonds US Bills Standard deviation 0. .5 0 -3. This may relate to the destruction from the two world wars.0% respectively. Paul Marsh and Mike Staunton. This compares with 5. equities beat bonds by 3. Figure 1 opposite shows that the real equity return on European equities was 4.9% and US bills by 3.9 3.) Figure 3 Returns and risk of major asset classes since 1900 25 20 15 10 5 4. Germany.3 Source: Elroy Dimson. where Europe was at the epicenter. Sweden and the UK. Figure 3 shows that the long-term real return on European equities was an annualized 4. the figures opposite are in US dollars from the perspective of a US international investor.8% per year. indicating that the Old World countries have underperformed. Ireland. we might argue that these 13 countries represent the Old World. Europe Figure 1 The Old World The Yearbook documents investment returns for 13 European countries.5 6.a. this European index can be designated in any desired common currency. Finland. or to the fact that many of the New World countries were resource-rich.7 21. over the last 111 years.8 -10 2001–2010 1986–2010 1961–2010 1900–2010 Premium vs Bonds (% p.8 3.8%. which gave a real return of 0.) Premium vs US Bills (% p. We have therefore constructed a 13-country European index using the same methodology as for the world index.9 for US bills. Loosely.0 7.5 15.5 1 0 1900 10 20 30 40 50 60 70 80 90 2000 10 Equities Bonds US Bills Figure 2 Equity risk premium over 10 to 111 years 10 5 2.9 3.8% and 1. the real value of equities. For additional explanations of these figures.8% as compared to bonds and US bills. with income reinvested.9 -5 0. For consistency.5 for bonds and 2.000 175 100 10 2.9 2. It is interesting to assess how well European countries as a group have performed.a. Annualized performance from 1900 to 2010 1. Italy. Credit Suisse Global Investment Returns Sourcebook 2011.8 1. As with the world index. since 1900.2 4.3 as compared to 2. Norway and Switzerland). grew by a factor of 175. France. or perhaps to the greater vibrancy of New World economies.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 Country profiles_53 Capital market returns for Europe (in USD) Figure 1 shows that.9 4.

published by Wiley Finance. the development of custom solutions and investment products. Mr Holland holds degrees in Chemical Engineering from the University of Illinois (BS) and Stanford University (MS). He has advised on several public enquiries. Harvard Business Review. Mr Matthews is an MBA graduate of Northwestern Kellogg Graduate School of Management. where he has been a Governor. Chair of the Finance and Accounting areas. where he produces the London Business School Risk Measurement Service. and has acted as a consultant to a wide range of financial institutions and companies. was previously a non-executive director of M&G Group and Majedie Investments. and Dean of the MBA and EMBA programs. David Holland David Holland is a Senior Advisor to Credit Suisse. Bryant Matthews Bryant Matthews is the Director of Research at Credit Suisse. and counselled the South African Reserve Bank on market expectations. and other journals. He was previously co-Head of HOLT Valuation & Analytics. Dr Marsh has published articles in Journal of Business. and Journal of the Operations Research Society. Hong Kong and Switzerland. Journal of Portfolio Management. Deputy Principal. Journal of Financial Economics. and the generation of HOLT content. and is a member of the investment committees of Guy’s & St Thomas’ Charity. Research conducted by Mr Matthews and his team has resulted in many significant insights into understanding the link between corporate performance and stock price. a research resource of London Business School. the research and development arm of HOLT. and the Institute of Actuaries. estimating discount rates through a market derived approach. He has had articles published in Journal of Banking & Finance. Financial Analysts Journal. and an MBA at the University of Cape Town. HOLT Division. and designed numerous valuation frameworks for Institutional Investors. published by Wiley and writes a regular column for Wilmott magazine. Journal of Finance. He has acted as consultant for various banks and professional bodies in the field of finance. advised corporations and private equity firms on strategy and valuation. He was responsible for improvements to the HOLT CFROI® framework. a corporate strategy and valuation advisory business he owned in South Africa. He has published articles in Journal of Business. including the Masters in Finance. His PhD in Finance is from London Business School. His PhD in Finance is from London Business School. London University. which underpins this Yearbook and the accompanying Credit Suisse Global Investment Returns Sourcebook 2011. the Society of Investment Professionals. Paul Marsh Paul Marsh is Emeritus Professor of Finance at London Business School. he co-designed the FTSE 100-Share Index and the RBS Hoare Govett Smaller Companies Index. With Elroy Dimson and Paul Marsh. and UnLtd – The Foundation for Social Entrepreneurs. he co-authored the influential investment book Triumph of the Optimists.CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2011 _54 About the authors Elroy Dimson Elroy Dimson is Emeritus Professor of Finance at London Business School. . He has taught at universities in the United Kingdom. and other journals. He has worked with the world’s leading fund management firms on designing investment decision processes. an elected Governor and Dean of the Finance Programmes. Dr Staunton is co-author with Mary Jackson of Advanced Modelling in Finance Using Excel and VBA. Financial Analysts Journal. Mike Staunton Mike Staunton is Director of the London Share Price Database. He is a Director and Past President of the European Finance Association and is an elected member of the Financial Economists Roundtable. He chairs the Strategy Council of the Norwegian Government Pension Fund – Global. Journal of Financial Economics. He joined Credit Suisse in January 2002 when the firm acquired HOLT Value Associates LP. He has been appointed to Honorary Fellowships of Cambridge Judge Business School. Areas of recent investigation include empirical research on corporate fade dynamics. Mr Holland joined Credit Suisse First Boston in May 2002 from Fractal Value Advisors. Faculty Dean. With Elroy Dimson. Journal of Portfolio Management. and the development of risk models useful in understanding how risk evolves over time. produced since 1987 at London Business School. Within London Business School he has been Chair of the Finance area. is currently Chairman of Aberforth Smaller Companies Trust. published by Princeton University Press. Journal of Finance. He co-authored the book Beyond Earnings: A User’s Guide to Excess Return Models and the HOLT CFROI® Framework with Tom Larsen. His PhD in Finance is from London Business School.

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