Innovative  Independent  Thinking
Before you use our website we need you to know this. Click on each section for the full information.
We do not offer investment advice to private investors

Absolute Return Partners does not offer investment advice to private investors (Retail Clients as defined by the UK Financial Conduct Authority). All such investors are advised to contact Quartet Investment Managers on +44 20 8939 2920 or visit quartet-im.com.

Our website does not give investment advice

The information contained on the website you are about to access (Website) is for information purposes only and does not constitute and should not be construed as advice on which reliance should be placed, nor is it an offer by Absolute Return Partners LLP (ARP) to enter into any contract or investment agreement or a solicitation to buy or sell any investment in any jurisdiction or in any circumstances. Any information provided in relation to a specific fund is not intended to provide a sufficient basis on which to make any investment decision as any such decision requires careful study of the offering memorandum of the relevant fund.

Information about Unregulated Collective Investment Schemes is not intended for the general public

No information on the Website is intended to amount to the financial promotion of Unregulated Collective Investment Schemes which are not authorized or recognised by the UK Financial Conduct Authority (FCA) and cannot be promoted to the general public. Any such information is intended solely for certain classes of investors permitted to receive it under relevant legislation and regulations, including investors falling within the qualifying categories set out the Conduct of Business Rules contained in the FCA Handbook or in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2005, in each case as amended or replaced from time to time. This is because such investors are sufficiently experienced and sophisticated to understand the risks associated with such investments, including the possibility of a substantial loss or complete loss of their investment.

Our website stores information on your device

Our website uses technologies, such as cookies, to distinguish you from other users of our website, which helps us to provide you with a good experience when you browse our website and also allows us to improve our site. We do not use these technologies for third-party related advertising or for storing/collecting personal information. For more information please see our Privacy Policy.

You accept our Terms and Privacy Policy when using our website

Before accessing the Website you should carefully read the terms set out in our Terms of Website Use and our Privacy Policy as these will apply to the entire contents of the Website and to any correspondence between us and you.

By accessing any part of the Website you are indicating that you accept these terms and that you agree to abide by them. If you do not accept these terms, do not use the Website.
Agree and close

ARP Observations

Does demographics matter to long-term equity returns?

Share
Further reading
See all articlesThe Absolute Return Letter

Middle-aged adults are natural risk takers and, on average, they prefer equities over bonds as they save for their retirement. Meanwhile, senior citizens make no positive contribution to equity market returns. In their 60s, they disinvest to buy bonds, following which they buy goods and services that they no longer produce.

The effect from ageing can be measured on P/E ratios with equity valuations in the United States peaking at about the same time as the ratio between middle-aged and old-aged people did as the chart (1) below shows.

U.S. M/O ratio versus equity valuations
Chart 1:  U.S. M/O ratio versus equity valuations
Source: “The population conundrum”, Financial Times, November 2012.

In 2012, Robert Arnott and Denis Chaves published a study, which I believe to be the largest ever conducted on the effect on economic growth, stock and bond market returns from changes in age distribution. Arnott and Chaves used 60 years of data across more than 100 countries in their study. The objective was to assess whether changes in the age composition of the population has a significant effect on capital market returns and/or on economic growth. Returns were measured as excess returns over cash in order to adjust for the fact that the risk-free rate of return is vastly different across markets and time.

For the purpose of this I’ve concentrated on equity returns (chart 2). The chart peaks at around 1% for the 50-54 age cohort, meaning that a 1% higher concentration of 50-54 olds would lead to an increase in annual excess equity returns of approximately 1%. Likewise a 1% higher concentration of the 70+ age cohort would lead to a decrease in annual excess equity returns of about 2%.

 Equity returns versus demographic shares
Chart 2:  Equity returns versus demographic shares
Demographic Changes, Financial Markets, and the Economy, Robert Arnott and Denis Chaves, Financial Analysts Journal, Volume 68 No. 1, 2012.

Given the large number of boomers knocking on the 70+ door, you will ignore demographic factors at your own peril. We know that total U.S. household wealth is approx. $84 trillion. We also know that U.S. baby boomers own 60% of the nation’s wealth, so their impact on equity markets shouldn’t really come as a surprise. What has been a tailwind for many years is likely to turn into a sizeable headwind in the foreseeable future.

The biggest equity buyers (the 40-49 year olds) are being outnumbered by the biggest bond buyers (the 60-69 year olds), pushing bond valuations up and equity valuations down. Importantly, that trend is likely to continue until at least the mid-2020s, which raises another question and one that I won’t attempt to answer right now. How much of the recent strength in various bond markets should actually be attributed to QE and how much is due to demographic factors? Nobody really knows the answer to that question, but I suspect that the significance of central bank policy has been overestimated.

So, yes, demographics matter to equity market returns, as the Japanese have come to realise. It is no coincidence that the great equity bull market has coincided with the baby boomers going through their middle ages.

About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.