Established industries often beat new technology investment returns according to research published on Tuesday. While companies rise and fail in all sectors the researchers found that a strategy of investing in only companies which that had been listed on a public stock exchange for at least 20 years would have converted £1 into £60 since 1980. While buying the shares of young companies listed for less than three years would have made only £20 as many IPOs (initial public offering) falter after an initial surge.
Warren Buffett, the famous US investor, doesn't need to read this research and the compounded annual gain 1965-2013 of his Berkshire Hathaway [pdf] is 19.7% compared with the S&P 500 with dividends at 9.8%. The overall gain 1964-2013 is 693,518% and 9,841% respectively.
The Credit Suisse Global Investment Returns Yearbook and Credit Suisse Global Investment Returns Sourcebook were published Tuesday.
In the 2015 Yearbook, the authors, Elroy Dimson, Paul Marsh, and Mike Staunton of London Business School, examine two issues: first, the long-run rise and fall of industries and the implications for investors; second, the rationale, costs and benefits of responsible investing.
The authors show that although successive waves of new technology have transformed the world, investors have not always been the main beneficiaries. Stock markets in 1900 were dominated by industries such as railroads which today have small weightings or are extinct. Meanwhile, today’s markets have high weightings in industries that were small or non-existent in 1900, such as information technology, telecommunications, aerospace, oil and gas, pharmaceuticals and biotechnology. Yet the authors show that US railroad shares outperformed the market over the last 115 years, while investment in new technologies has sometimes frustrated investors.
The authors describe how new industries are born on waves of IPOs, which, as a group, have underperformed. Stock returns tend to be higher for seasoned stocks, with older companies outperforming newer ones. They find that industry rotation based on value has generated a premium. This is consistent with there being periods of overvaluation for growth industries which this rotation strategy helps avoid; and periods of undervaluation for value industries which the strategy exploits.
Paul Marsh, emeritus professor of Finance, London Business School, notes, however, that: "Momentum appears to be an even more effective industry rotation strategy. Buying last years’ best-performing industries while shorting the 20% of worst performing industries would, since 1900, have given an annualised winner-minus-loser premium of 6.1% in the USA and 5.3% in the UK. Before costs, US investors would have grown 870 times richer from buying winning industries rather than losers."
The authors also show that many countries’ stock markets are highly concentrated within a few industries, while many industries are concentrated within a few countries. They conclude that, to exploit diversification opportunities to the full, investors need to diversify across a wide spread of industries and countries. Both matter, although there is evidence that globalisation has led to a decline in the relative importance of countries, with industries assuming greater importance.
The authors say investors are increasingly concerned about social, environmental and ethical issues, and asset managers are under pressure to be responsible investors. This can take the form of “exit” via ethical screening, or “voice” through engagement and intervention.
“’Exit’ typically involves excluding companies, industries or countries regarded as distasteful or unethical. However, principles can have a price, since sin stocks may perform well, as illustrated by the strong historical performance of the Vice Fund. Similarly, Dimson, Marsh and Staunton find that the best-performing industries since 1900 have been tobacco in the USA and alcohol in the UK. They review other research studies that confirm the superior long-run performance of sin stocks, and during recent years, they find better returns from the most corrupt countries.
Elroy Dimson, emeritus Professor of Finance, London Business School and chairman of the Newton Centre for Endowment Asset Management at Cambridge University, suggests that: “Ironically, responsible investors may be partly responsible for the higher returns from sin. If a large enough proportion of investors avoids sin businesses, their share prices will be depressed, thereby offering the prospect of elevated returns to those less troubled by ethical considerations”.
Nokia, Europe and Japan's old companies versus US young champions