With global equity markets at record highs, advisors and investors can be justifiably concerned as to the timing of committing large sums of money to this asset class.
In this article, we have researched the data of global equities performances over the past 30 years, using the MSCI World as a proxy, and using multiple entry points to determine the average return profile, including investment points when markets were at their highest levels.
The reason that we have selected the MSCI World Index (the tracking of which is a core component in our house-view equity portfolios) as our proxy for global equities’ returns, is that it tracks the performance of +-1,600 companies weighted according to their market capitalisation, across 23 developed countries. This broad measure of the global equity market represents companies listed in countries such as the United States, Japan, the United Kingdom, Canada, Germany, and others.
Even during periods of higher inflation and interest rates, entry points when equities markets are at their highest, and observation points when markets were at their weakest, the MSCI World Index has proven to deliver inflation-busting returns over the longer term. This is notwithstanding criticism for concentration risk of the weighting of some large cap stocks in particular, and US equities in general, in the Index.
As the chart below shows, it is rare for the MSCI World Index to deliver below inflation returns or even an absolute loss over a rolling five-year period. The exceptions can be observed in 2009 and 2011-2012, both as a result of the Global Financial Crisis.
Even in difficult periods, patient investors that held tight for a few months would have been rewarded. When we average out rolling annual returns on a five-year basis, we find that the MSCI World Index delivers annual returns of 8.3% versus inflation of 2.3%, giving a return that is 6% better than inflation.
Looking at a 10-year rolling chart, we can see the MSCI World Index consistently and comfortably beats inflation over 10-year periods, even when entering at the worst levels. With annualised returns of 8.4% and average inflation of 2.1% in the US, the MSCI World Index beats inflation by 6.3% on an annualised basis.
Phasing in or “all-in”?
Given that the Index, like all equities markets, is volatile, some investors might question whether it is wise to take a phasing-in approach to avoid the risks of investing when the market is at a peak before a crash. As our chart below shows, the strategy of trying to time the market in this way is generally suboptimal.
Markets generally trend upwards over the long term. If you invest a lump sum right away, your money is fully exposed to the growth potential from the outset. When you phase in, a portion of your capital stays in low-yield assets while you wait to deploy it into the market. The missed opportunity to capture market growth can weigh down overall returns. However, what can also be seen from the chart is that the phase-in approach does provide much less volatility in the returns after the first 12 months – both on the upside and the downside. The risk of mistiming the markets in the short term is, therefore, substantially reduced.
In our philosophy, investing in trackers that follow indices such as the S&P 500 or the MSCI World Index is only part of the approach. Depending on our investors’ horizons and objectives, we also usually advocate for an actively managed fund component – with a bias towards quality managers.
This approach offers some mitigation against the concentration risks of the high-flying mega-cap tech that have a heavy weighting in the tracker ETFs. It also offers clients exposure to countercyclical stocks that tend to come into their own when markets in general are slumping.
Conclusion:
Global developed market equities have empirically proven to be excellent investments from which to build real (adjusted for inflation) wealth over the vast majority of entry points over the long term.
Although there are no guarantees, statistical evidence would tend to favour lump-sum investments into global equities at any point in time, rather than adopting a phasing-in approach. However, the phasing in of funds can be very effective in terms of a risk mitigation strategy over the short term. We thus prefer to overlay this strategy with a valuation approach to markets in times where we feel that equities are fully valued and when there are specific short-term risks on the horizon – such as the pending US election.