UK asset class returns

Asset class returns from 1955-2000
Using share price and listing information in the London Share Price Database (LSPD) maintained at London Business School, a new set of indices for UK financial asset returns, starting in 1955, was created. The indices cover equities, including large, small, and micro-cap stocks; government bonds, comprising long and intermediate term bonds, index-linked bonds and treasury bills; and inflation. The data are consistent with the CRSP/Ibbotson series for the US. Examination of the value and small cap premiums in UK stock returns have also been measured for the 1955- 2000 period.

Stocks
UK market composition over the 1955 - 1999 period, as defined by the ABN AMRO/LBS Equity Index, is shown in the table below. Large cap stocks comprise 90% of the UK market in terms of market capitisation, but represent only 1.50% of UK stocks. Small cap stocks, comprising the next 9% of market capitalisation, represent 5.43% of UK stocks. While micro cap stocks make up only 1% of the UK market by market cap, they represent 92.97% of UK companies.

Bonds

 * Treasury bills: rolled-over 90-day treasury bills
 * Intermediate bonds: All high-coupon gilts with maturity of 4½-6½ years
 * Long bonds: all high-coupon gilts with maturity of 15½-30½ years
 * Inflation: Retail Price Index (before 1962, Index of Retail Prices)

Inflation indexed bonds
Index linked bonds first became freely available in the UK in 1981.


 * Index-linked bonds: all index-linked gilts with maturity of 15½-25½ years
 * Inflation: Retail Price Index (before 1962, Index of Retail Prices)

Indexing vs. active management in the UK
A white paper published by Vanguard UK Institutional examines the performance of UK active funds against portfolio benchmarks over the fifteen year period, 1996- 2011. The paper explores relative performance; the relationship between volatility and return; persistence of active fund performance; market cycle performance; expenses; and performance distribution. A summary of the paper's findings:


 * Returns vs. benchmarks

The paper finds that the median active fund has consistently underperformed benchmarks (as defined in each fund's prospectus), especially when survivorship bias, which has been substantial over the period, is taken into account. The following table provides data for five, ten, and fifteen years. The first percentage shows percentage of active funds under performing benchmark performance. The percentage figure underneath shows the annualized performance differential.

In each of the equity and fixed income categories included in the table above, (for the period 1/1/2002 to 31/12/2011) the index benchmarks produced higher returns than the median UK active fund with less, or equal volatility.
 * Volatility vs. return

While active strategies in some asset classes showed periods of relative out performance over some bull or bear market cycles, there is no systematic tendency for them to do better at particular stages of the cycle.
 * Market cycle performance

Dividing active fund performance in five year performance quintiles ( over the 2001-2006 period), and measuring returns over the subsequent five years, shows that persistence of active fund performance is little different than random. While 16% of top quintile funds (selected in 2006) maintained first quintile performance five years later, the investor faced a 60% chance of falling into the bottom 40% percentile performance or having the fund disappear. Of the 364 funds available to the investor in 2006, only 12 funds (15.6%) maintained top quintile performance over both five year performance periods.
 * Persistence of active fund performance

In general, UK index trackers have lower total expense ratios than active funds.
 * Expenses


 * Performance distribution

While some UK active funds out perform bench mark UK index funds, the range of dispersion in index fund performance (5 year returns ending 31/12/2011) is much lower than the range of active fund performance. Over this period, more active funds under perform the benchmark tracker funds than outperform them, and the range of under performance is generally larger than the range of out performance.