My original AFR column on the 'equity premium' over bonds stirred a bit of a controversy. Academics Sam Wylie, who is a friend and long-time equities advocate, and Kevin Davis, have both published responses. I explain why they are wrong in a new AFR column today. This is an important research issue as it has profound ramifications for asset-allocation within Australia's $1.4 trillion super fund sector. There is a summary available in the paper today with the complete copy online. Here's a teaser:
Wylie asks, “Who will bear the risk of owning shares if not…super funds?” The answer is presumably found in those investors who provided all the equity capital prior to super’s establishment in 1992.
Davis says that owning a portfolio of government bonds has been “accompanied by relatively high risk” though “not as much risk, nor quite as high a return as investing in equities”. This is a mischaracterisation.
Over the past three decades, the volatility of Australian shares has been more than twice that displayed by Commonwealth government bonds. In exchange, you’ve received an annual total return premium of 1-2 per cent. You judge whether that trade-off stacks up.
