‘M5’ Equity Markets


Exhibit-1 (above) shows annualised performance of the equal-weight equity composite index, compared to LPP-C40, the main performance benchmark relevant to Swiss pension funds. Across nearly all shown time frames, equities have performed better than that benchmark. Yet, in the return comparison 31.12.1999 to date, equities underperformed. Thus, the time between 1999 and 2009 must have seen rather poor performance in equities. Indeed so poor, that higher returns in the more recent past (essentially the last three years) have been insufficient to paper over performance cracks originating in the first decade of this millennium.

Put differently, strategic and tactical decisions in asset allocation will have had a profound impact on long-term performance, for better, or worse, while passive approaches have resulted in considerable opportunity costs.

Exhibit-2 (below) gives index values at specific dates (corresponding to the time frames used on the previous as well as later pages) and calculates rates of return since then. For ease of comparison, in the bottom part, the best and worst performing markets for each time frame are highlighted in colour.

Long term (ten years), US and Japanese equity markets have generated much higher returns than the rest of the group. More recently (12 months) Eurozone equities have bounced very strongly, with Japanese equities being the poorest performing major equity market.


Exhibit-3 (above) shows performance over the most recent 12 months and highlights just how much individual markets differ from one another: Europe, Switzerland, and the US have the lead, while Japan and Great Britain had lacklustre performance by comparison. This is a very different pattern compared to longer time horizons, where the equity markets of Europe were among the poorest performers.

Exhibit-4 (below): With the US and the Japanese equity markets as engines, the M5 Composite Index has risen meaningfully over the last 10 years and better than a multi-asset index such as the LPP-C40 pension fund benchmark. But it was not as smooth a ride as the simple on-balance analysis might imply.

The lower part of the illustration shows a plot of equity performance relative to LPP-C40. Between November 2009 and the spring of 2013, equities had gone nowhere on a relative basis. While they are now at an all time high in absolute terms, the relative peak formed in the spring of 2015 has yet to be exceeded. In effect there were two stages during which equities did best: late summer 2012 to fall 2015, and again from summer 2016 to autumn 2018. For approximately a year now, equity performance has merely been on par with the multi-asset benchmark.


The chart in exhibit-5 (above) shows the value of all five national markets, rebased to 100 at the start of the observation period. Equity indices in all five countries have increased in value. But not all equity markets are created equal. The clear winners over this period of ten years are US equities and Japanese equities. This is in spite the very different performance over the most recent 12 months, as shown earlier in Illustration 3.

Exhibit-6 (below) shows index values, performance and performance differentials to the composite for the last 120 months in the upper portion. Red signifies negative performance differentials to the composite.

In the lower part of the table, results of a regression analysis of the monthly rates of change is shown. Alpha (intercept with y-axis) is shown in green when positive, in red when negative. Beta (slope of the linear regression) is shown in green when above zero and in ed when below zero. 0).

Remarkable are the resulting values for R-squared (a measure of congruency): These values are generally somewhat lower than one would probably expect between equity markets and an equal-weight composite.


In exhibit 7 (above), the changing correlation (r-squared) between the markets is shown in the form of trails over 36 months each. It vividly shows how congruency among markets is subject to meaningful change, having been fairly high late 2009 and dropping to a low in the spring of 2015 and again late 2018. Correlation among European and British equity markets is most divergent, probably reflecting the uncertainties of Brexit.

All in all, the graph emphasises the merits of choosing markets within one and the same asset class.

The graph of exhibit-8 (below) plots performance of each market relative to the composite index. Note how constantly poor British equities have fared for all of these 36 months. Up and until the end of 2017, Japanese equities had been the clear ‚engine’, only to be replaced by European shares, while the US equity market is the clear winner over all.

In essence, the performance of Swiss, Japanese, and European equities mattered little over the last three years. Excess of performance was generate by identifying the sustained development of US equities (positive) and British equities (negative).


Also focussing on the recent 36 months, this table (exhibit-9, above) illustrates that all major equity markets have increased in value but to very different degrees. Equities are by default a risk prone investment and it is uncommon for risk-adjusted rates of return to be positive. Except for Europe and Britain, adjusted returns were positive in the last three years, pointing to the exceptional development in equity markets during this time.

The market with the highest nominal performance (USA) also generated the highest risk-adjusted rate of return, while the highest risk market (Great Britain) was also the poorest performer. The very high frequency of positive monthly changes in the US market (just under 80%) looks excessive.

Exhibit-10 returns to a ten year time frame, showing trailing 36 month returns. In the more recent past, only three equity markets have been close to, or even below ‚zero’ by this measure: Switzerland, Europe, and Great Britain. Of these three, Swiss and European equities seem to develop some momentum recently, catching up with their US and Japanese peers.

Prior to that, and early in the graph, Japanese equities had gone from worst (summer 2010) to best (fall 2015), only to drop sharply and fall behind US equities from the fall of 2017 onwards.


Exhibit-11 (above): Matching the approach behind the display of returns in the previous illustration, this chart shows 36 month trails of observed risk. Currently, the risk for all five markets travel in terrain that must be seen as historically moderate but not quite low enough to be considered excessively low. What seems noteworthy at this point in time is an apparent convergence of risk across all markets.

Preceding illustrations revealed how distinct the five equity markets have performed relative to one another at certain points in time. Exhibit-12 (below) shows the on balance effect, calculating returns since the end of 1999, nearly 20 years.

The performance differentials accruing over such a long time are most striking. The US equity market appears to be have been in a league of its own, being the only national equity market to have meaningfully exceeded the composite. While the return generated in that time stands at just under 4%, it is still twice the return of the second best performing market, Switzerland. While British equities have barely moved, European shares have actually fallen.

From the point of view of Swiss pension funds, a ‚buy-and-hold’ strategy in equities will have produced disappointing results during the last 20 years. This graph underscores the importance of selective investments and should be seen as a powerful argument against passive approaches.