Equity Returns Assumptions Remain Totally Unrealistic

Brian Sturgess - March 2013

Speed Read
  • Equity returns over long periods of time are unlikely to significantly exceed real GDP per capita growth rates which have averaged around 2% in Europe and the USA over the last fifty years.
  • The Credit Suisse Global Returns Yearbook 2013 based on research from the London Business School predicts equity returns of only 3% to 3.5% average per annum in the next 20 to 30 years on the basis of past long-run performance.
  • The growth assumptions of most private and public pension and savings fund providers are too optimistic with projected real returns double or treble more realistic levels.

Long term equity returns unlikely to exceed real national income growth

Long-term equity returns are unlikely to exceed the rate of growth of real GDP per capita. The long term growth in the return on assets employed in an economy must move in line with the growth rate in economic activity. In the short-term, however, the relationship between GDP growth and equity returns is controversial[1] and GDP forecasts are not reliable predictors of returns on assets. Nevertheless, real GDP growth is necessary to provide the resources to meet both private and public sector future pension fund liabilities.


An analysis of long-run economic data in the latest annual Global Growth Monitor published by World Economics [2] covering the period 1961 to 2012 shows that Europe averaged real GDP per capita growth of 2.0% per annum. In the US, the long-run fifty year average growth rate was also just 2.0% per annum. The decadal growth rate data over this period for Europe and the USA are shown in the Table. Any projections of future GDP per capita growth in the USA and Europe as a basis for expectations about future equity returns must be made in the context of the weight of historical data in the Table.



Credit Suisse predicts equity returns of 3-3.5%

A long term perspective on equity returns can be found in research carried out by Professors Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School and published in the 2013 Credit Suisse Global Investment Returns Yearbook[3]. This report predicts that the average real return from investing in global equities are likely be somewhere between rates of 3% to 3.5% over the next 20 to 30 year time period. The Credit Suisse Yearbook also showed that the high equity returns realised by investors between 1981 and 2008, a period when growth in GDP per capita was above long-term average rates for the US and the UK, were abnormal in a historical context.


The history of the period of high returns has produced an upward bias in expected rates. In the US the average expected return on pension plan assets of the S&P 500 companies are reported to be targeting future annual returns of 7.6%[4]. In the UK and Canada projected real returns are in the range of 6-6.5%[5].


Public sector assumptions on future returns are also high. In the UK consultants PriceWaterhouseCoopers (PWC) produced a report in 2012 by for the Financial Services Authority (FSA) on the recommended range of projected rates of return that firms advertise that investors should expect, but are not guaranteed to receive from pensions and other savings plans. On the basis of the PWC report the FSA recommended that the projected real rates of return used by the industry of what a pension should be worth if the fund grows by 5%, 7% and 9% be cut to 2%, 5% and 8% and that these new rates should come into effect in April 2014.  Funds invest in bonds as well as other financial assets including equities, but since the equity risk premium over government securities assumed by PWC in its report for the FSA was in the range of 4.0% to 4.5%, with the return on bonds expected at 0.5% to 1.0%, this makes it far harder for a mixed portfolio to realise returns. Another UK public body, the Department of Work and Pensions is still using a projected rate of return of between 4.8% and 8% for new pension plans.



Return expectations unlikely to be met

Assumptions on future rates if return on investments are far too optimistic. The Credit Suisse report’s predicted long run returns in the range 3.0% to 3.5% implies that liabilities based on an expected return of 5% per annum cannot be met. A rate of 3.0% itself may be too high. There is no foreseeable reason based on long-run historic growth in real national income why GDP per capita growth rates will exceed around 2% per annum given the demographics of western economies with their rapidly ageing populations, increasing dependency ratios and high levels of accumulated private and public debt. Instead there are many reasons why GDP per capita growth rates may be lower reducing the aggregate rate of profit with depressing consequences for future real equity returns.


Pension and savings funds are highly unlikely to achieve the level of returns required to meet the range of optimistic assumptions on returns. According to Professor Paul Marsh of the London Business School, “.although we have been living with low rates for several years, many investors still seem in denial. Return projections by asset managers, retail savings product providers, pension funds, and even governments are often still too high. Such optimism is dangerous, because it misleads, and it also masks the need for remedial action.”[6]  




Credit Suisse (2013), Global Investment Returns Yearbook: http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf


Financial Services Authority (2012), Rates of return for FSA prescribed projections, Report of PricewaterhouseCoopers and peer reviewers’ comments:



Milliman, (2012), 2012 Corporate Pension Funding Survey, Seattle WA: Milliman Inchttp://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-study/

Schroders (2013), GDP growth and equity market returns, Talking Point, February 22, http://www.schroders.com/tp/home?id=a0j50000002wvYdAAI

Sturgess, B. T. (2013), Bond yield comparisons are seriously distorted by using consumer price index deflators, World Economics, http://www.worldeconomics.com/papers/Bond%20Yield_Comparisons%20CPI_0421e952-4e4b-4415-b8a7-1331abc84697.paper





[1] See Schroders (2013).

[2] See Global Growth Monitor, February 2013:http://www.worldeconomics.com/papers/Global%20Growth%20Monitor_7c66ffca-ff86-4e4c-979d-7c5d7a22ef21.paper

[3] See Credit Suisse (2013).

[4] See John Plender, Equity expectations hail from cloud cuckoo land, Financial Times, February 10, 2013: http://www.ft.com/cms/s/0/5e694dc8-705a-11e2-ab31-00144feab49a.html#axzz2MCoMfiSA.

[5] See Steve Johnson, Fund fees ‘not sustainable’, Financial Times, February 10, 2013: http://www.ft.com/cms/s/0/ffcc9f56-711a-11e2-9b5c-00144feab49a.html#axzz2MCoMfiSA

[6] See Investors in denial, London Business School: http://www.london.edu/newsandevents/news/2013/02/Investors_are_in_denial__1591.html