Expected Returns: An Investor's Guide to Harvesting Market Rewards

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The historical record: The past 20 years in a longer perspective

• Any historical snapshot is sample specific. I try to put the experience of the 1990s–2000s in a longer perspective.

• Between 1990 and 2009, duration risk was well rewarded, credit and equity risk were not. Emerging Latin American equities, venture capital, and small-cap value stocks earned the highest average returns. Equity assets had modest SRs compared with various fixed income assets as well as active funds and strategies. Front-end Treasuries had the highest SRs.

• Asset return data from different sample periods are not really comparable even if the sample periods are quite long, but here are some empirical findings. Equities outperformed other asset classes; in particular, they outperformed bonds by 4% per year since 1900. Small-cap value stocks earned especially high returns, although trading costs reduced their paper advantage. The long-run reward for extending duration peaked at intermediate maturities at about 1%. The long-run credit premium was only 0.3% for investment-grade debt but over 1% for high-yield debt. Among rating classes, BB-rated debt—just below investment grade—performed best and CCC-rated bonds performed surprisingly poorly. Non-income-earning assets earned low long-run returns.

• The best long-run SRs were for front-end Treasury trades (that cannot be levered), high-turnover reversal strategies (before accounting for costs, which are substantial), short-dated credits, and active value/carry/momentum ...