A comparative analysis of returns of various financial asset classes in South Africa: a triumph of bonds?

Abstract

There is a popular view that equities always outperform other fi nancial asset classes; especially bonds. This study investigates the performance of three common asset classes to determine whether or not this view is validated in South Africa. Conceptually, the popular view is irrational. If one class consistently and materially outperforms other asset classes, in the absence of other reasons, the other asset classes would disappear. Accordingly, rationally, in the long run and on a risk-adjusted basis, returns on all asset classes should conceptually more or less converge. The results from this study, which concentrates on equities, bonds and cash, show that in South Africa, even before adjusting for risk, there was no material difference between the returns of equities over long bonds over the 27-year period covered by this study (1986–2013). This is equally true for other shorter fi xed periods with the end-date (28 February 2013) being the focal point. It is even more evident that bonds outperform equities when a system of rolling periods is used. On a nominal basis (before adjusting for risk), over any randomly selected rolling period, bonds outperform equities in six of the seven categories. This study does not take tax into consideration. After adjusting for risk using the Sharpe ratio or other risk measures, bonds outperformed equities.

Key words: equities, bonds, cash, performance, asset classes, risk-adjusted basis, outperformance