‘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 Britisch 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: US equities, and the markets of Europe (Eurozone), and Switzerland take the lead, while Great Britain underperforms massively. This is a very different pattern compared to longer time horizons, where all markets in Europe were among the world’s 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. At the start of 2020, the relative of equities to the multi-asset benchmark has yet to exceed the peak of 2015.


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 exhibit-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, green a positive differential. Note the massive gap of some 150% performance between top (USA) and flop (GB).

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 red when above zero, and in green when below.

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


Exhibit 7 (above). Scatters show equity markets (and the ‘M5’ composite) in terms of normalised return (vertical) and normalised risk (horizontal). The left diagrams shows latest three years, the one on the right latest five years. A dashed diagonal line denotes equal values for both variables.

Comparing the two diagrams reveals how the mix between returns and risk have shifted in the more recent past. All but the GB equity market have improved, meaning returns have improved with declining risk. This is particularly true for European equities. Even so, across the latest three years, only two markets have been ‘risk efficient’ (i.e. above/left of the dashed diagonal line).  Equities in Great Britain currently show the highest risk with dismal return of the five sample markets.

The graph of exhibit-8 (below) plots performance of each market relative to the composite index and zooms closer, only covering the latest three years. 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 performance was generated by identifying the sustained divergence between US equities (pushing up) and British equities (dragging down).


Also focussing on 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. US and Swiss equities have had positive risk-adjusted returns over the last three years. Compare differences in nominal returns with this in ‘observed risk’.

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. A glance at the horizontal distortion shows that, except for European equities, the distribution of monthly returns cannot seriously be considered ‘normal’, exposing the popular risk metric ‘volatility’ as scientifically illegitimate.

Exhibit-10 returns to a ten year time frame, showing trailing 36 month returns over 120 months.  British equities seem somewhat isolated recently, having given up momentum, while other markets have either gained or kept speed. US equities have been able to remain fairly highly levels of momentum for over seven years. The most pronounced change over time occurred in Japanese equities: worst in the summer of 2010, best in the fall of 2015 and currently closely joined to Swiss and European markets.


Exhibit-11 (above): Matching the approach behind the display of returns in the previous illustration, this chart shows 36 month trails of observed risk. Please note that risk is shown inverted: top of the scale shows low risk.

Having reached or approached excessively low levels of risk by the end of 2018, risk in all markets has increased again toward healthier and sustainable  levels. Put differently: equity markets do not appear ‘frothy’.

Any ex-post risk metric is a contrary indicator. Low risk readings describe a favourable risk environment in the past but tend to announce rougher patches ahead while very high ex-post risk denotes the darkest point of any night.

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 entire length of time since 31.12.1999.

The performance differentials accruing over such a long time are quite simply brutal, yet this is the norm and not the exception.

As an asset class, equity performance has been mediocre on balance, due to two distinct bear markets hidden within these twenty years. Against that backdrop, 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 a mere 4%, that it is still twice the return of the second best performing market, Switzerland. While British equities have barely moved, European shares have actually fallen.

It is unsurprising, that a ‚buy-and-hold’ strategy in equities, placing bets across the world and hoping for the best, will have produced disappointing results.

This graph underscores the importance of selective investments and should be seen as a powerful argument against passive approaches (benchmark cloning).