Tag Archives: Return

Green Returns

In the NBER working paper “Dissecting Green Returns,” Lubos Pastor, Robert Stambaugh, and Lucian Taylor argue that excess returns on green assets during recent years are unlikely to predict expected excess returns. At least that’s what theory suggests:

… green assets have lower expected returns than brown, due to investors’ tastes for green assets, yet green assets can have higher realized returns while agents’ tastes shift unexpectedly in the green direction. … green tastes can shift in two ways. First, investors’ preference for green assets can increase, directly driving up green asset prices. Second, consumers’ demands for green products can strengthen—for example, due to environmental regulations—driving up green firms’ profits and thus their stock prices.

In the data

… green stocks significantly outperformed brown stocks in recent years. … green stocks would not have outperformed brown without strengthened climate concerns. …

The bulk of the positive relation between green stock returns and climate-concern shocks evidently occurs with multi-week lags.

Expected returns on stocks are hard to identify, in contrast with expected bond returns. That’s why the authors analyze bond prices and yields:

The inverse relation between a bond’s realized return and the change in its yield to maturity is well understood, and the yield provides direct information about expected return, especially for buy-and-hold investors.

The case of German “twin” bonds illustrates this inverse relation in the context of climate concerns. Since 2020, the German government has issued green bonds, along with virtually identical non-green twins. The green bonds trade at lower yields, indicating lower expected returns compared to non-green bonds. The yield spread between the green and non-green twins, known as the “greenium,” reflects investors’ willingness to accept a lower return in exchange for holding assets more aligned with their environmental values. Since issuance, the 10-year greenium experienced roughly a three-fold widening, presumably due to growing climate concerns. As a result, the green bond outperformed its non-green twin by a significant margin over the same period. However, this outperformance does not imply green outperformance going forward. Rather the opposite is clearly true, given the now wider greenium.

Long-Term Real Rates of Return

More from the recent working paper by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan Taylor (“The Rate of Return on Everything, 1870–2015“). (Previous blog post about the return on residential real estate.)

  • Return data for 16 advanced economies over nearly 150 years …
  • …on the income and capital gains (and thus, total returns) from equities, residential housing, government bonds, and government bills.
  • Real returns average 7% p.a. for equity, 8% for housing, 2.5% for bonds, and 1% for bills.
  • Housing returns are much less volatile than equity returns.
  • Real interest rates have been volatile over the long-run, sometimes more so than real risky returns. Real interest rates peaked around 1880, 1930, and 1990. Current low real interest rates are “normal.”
  • Risk premia have been volatile, but at lower than business cycle frequencies.
  • r − g is rather stable in the long run and always positive. The difference rose during the end of the 19th and 20th century.

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The Residential Real Estate Premium (Puzzle)

On Alphaville, Matthew Klein discusses recent work by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan Taylor (“The Rate of Return on Everything, 1870–2015“) according to which

Residential real estate, not equity, has been the best long-run investment over the course of modern history.

… but they didn’t calculate the returns most homeowners actually experience. Most people borrow to buy housing and most people live in their properties without renting them out. This makes a big difference.

… Net rental income has historically accounted for half of the total returns from owning housing. It’s also far less volatile, dramatically boosting the Sharpe ratio compared to what you would get just by looking at changes in house prices.

Housing has beaten stocks since 1950 because rental income has been better than dividend income, not because house prices have grown more than stock prices.

On the Performance of Swiss Portfolio Managers

In the NZZ, Michael Schaefer reports on a study about the performance of Swiss portfolio managers in 2016.

  • The median portfolio returns in all investment strategies except those not investing in stocks fell short of the corresponding benchmark returns.
  • Only a fifth of the portfolios generated returns in excess of their benchmark.
  • These numbers do not yet account for management fees.
  • No portfolio manager generated high returns across all strategies.
  • But some managers consistently generate high returns in certain strategies.

Chile’s Fully Funded Pension System

On Project Syndicate, Andres Velasco argues that one of the sources of the current problems with the Chilean pension system are the high fees charged by fund managers:

A government-appointed commission recently concluded that managers have generated high gross real returns on investments: from 1981 to 2013, the annual average was 8.6%; but high fees cut net returns to savers to around 3% per year over that period.

The commission’s report.