Episode #75: Review of UBS Global Investment Returns Yearbook 2025

• INTRODUCTION

François Doyon La Rochelle:

You’re listening to Capital Topics, episode #75!

This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.

Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.

In our podcast today we will review the key findings from 26^th edition of the UBS Global Investment Returns Yearbook for 2025.

Enjoy!

• REVIEW OF UBS GLOBAL INVESTMENT RETURNS YEARBOOK 2025

François Doyon La Rochelle:

I will start this off for our Listeners.  Today’s topic is a Review of the 26th edition of The UBS Global Investment Returns Yearbook 2025 Summary Edition.  Reviewing the Yearbook is an annual ritual for our Podcast.  This is the second year it has been published under the UBS Brand. This change came about because of the merger of Credit Suisse and UBS. This is the 4th year we have published a podcast offering the UBS Global Investment Returns Yearbook and the content from the prior Yearbooks is still very relevant.

I would also like to highlight that the Yearbook is published by UBS in collaboration with Professors Paul Marsh and Mike Staunton of London Business School and Professor Elroy Dimson of Cambridge University.  They have been involved for all 26 years.

This being said, James, could you give our Listeners an Intro about the Yearbook and explain its purpose?

James Parkyn:

Ok, Francois.  The purpose of the Yearbook has not changed: “The Yearbook presents a historical record of the real returns from equities, bonds, cash, and currencies for 35 markets, spanning developed and emerging markets and stretching back to 1900.  Its purpose is not to make forecasts, but instead to inform investors about long-run performance, to interpret it, analyze it, learn from it, and help illuminate current concerns.”

The Yearbook content always returns to the anchor of risk and reward and the importance of diversification and asset allocation. As our Regular Listeners know, this is core to our Investment Philosophy.

François Doyon La Rochelle:

OK so now James, I’m going to start today’s review by asking you the same question as in prior years.  Why do you find the Yearbook useful as a Portfolio Manager.

James Parkyn:

Francois, my answer is the same as in prior years.  Our discipline is to invest with “an Investor Mindset, focused on the long term”.  We don’t want to be led astray by short-term noise in the financial media and by recent financial market volatility.  This challenge is daunting and applies to all Investors including us Professionals.  We have said it often on our Podcast: “It is simple to say but not easy to do: We must always be cognizant that we can fall into a trap of trying to “Forecast the Future”.  This is why the Yearbook is so useful to us as portfolio managers.

François Doyon La Rochelle:

I agree with you James.  The Yearbook helps put current financial market events into context by comparing them to long-term capital market history.  This year’s edition focuses on diversification.  The rationale for that is the US market concentration. The Yearbook states that it is now at its highest level for 92 years and the ten largest companies globally now account for around a quarter of global equity value”.

James Parkyn:

The Yearbook also covers the ongoing challenge of: “… rising correlations between markets, both developed and emerging, plus between equities and bonds, and of increased performance concentration among the largest companies…”  Our discipline of being globally invested has paid off so far in 2025 as U.S. Equity Markets have been much more volatile than other equity Markets.

François Doyon La Rochelle:

Well James, if we look at the April 30th, 2025, PWL Markets Statistics page we can find the Year-to-date results in Global Equity Markets in CAD:

1. The U.S Total Market is down 9.2% year to date and since reaching the peak in February it’s down 14.2%.
2. The CAD Index S&P TSX Composite was up 1.4%.
3. International Developed Equities are up 7.2%.
4. Emerging Market Equities are flat at 0.1%.

James Parkyn:

As we discussed in our podcast earlier this year, in the last 15 years or so U.S. Equity market returns dominated other Equity Markets.  This has led many investors to question the benefits of being globally diversified.  But this year, we finally see the benefit. As in our prior year’s Yearbook Reviews, Market History teaches us that we have to accept that sometimes diversification does not pay off. The Yearbook data helps us appreciate that over a much longer time horizon, it will.

François Doyon La Rochelle:

In this year’s Yearbook James highlights 10 the key insights of market history considered in the study. Let’s start with the first insight: “In 125 years of market history, markets have changed dramatically”

James Parkyn:

Indeed, they have.  The Yearbook states: “Markets at the beginning of the 20th century were dominated by railroads, which accounted for 63% of US stock market value and almost 50% in the UK.  Meanwhile, of the largest industries in 2025, energy (except coal), technology, and healthcare (including pharmaceuticals and biotechnology) were almost absent in 1900. Telecoms and media, at least as we know them now, are also new industries.”

François Doyon La Rochelle:

The Yearbook makes the point that the Markets are very different from what they were in the 1900s. The leading stocks today are not the leading stocks from the early days. I could even say that they’re not the same stocks from 20 or even 10 years ago. We have addressed this many times in our Podcasts. More recently in Podcast # 67, we reviewed Prof. Bessembinder’s Research where he found that most long-term equity market gains can be attributed to a small number of stocks.  His research also demonstrated how difficult it is to select them in advance. I believe that Bessembinder’s research kind of connects with the Yearbook, indirectly, by highlighting the change in the composition of the Equity Markets’ Leaders over time.

Now let’s discuss the second insight from the Yearbook: “The outperformance of stocks has been striking.”

James Parkyn:

Equity returns are volatile. No surprise there. It takes a lot of historical data points to obtain a realistic understanding of what long-run returns can tell us about the future. The Yearbook confirms that the annualized returns from 1900 were 9.7% for Global Equities versus 4.6% on Bonds, and 3.4% on T-Bills, and inflation has been 2.9% per year.

François Doyon La Rochelle:

Now the third insight is: “Real returns on government bonds have been modest”.

James Parkyn:

Again Francois, no surprise there. Last year in Podcast #61 where we reviewed Prof. Scott Cederberg, proved that bonds performed poorly after inflation over the long term. The Yearbook shows that the data from 1900 to 2024, in other words, 125 years, were not especially kind to investors in government bonds. I quote the Yearbook: “ Across the 21 continuous history markets, the average annualized real return was 0.9% (or 0.6% including Austria’s very low figure).  While bonds have generally been less volatile than equities, they have also experienced some protracted periods of very low or high returns. Since 1900, the average standard deviation of real bond returns across countries was 13.2 % versus 23.0% for equities and 7.5% for bills (excluding Austria)”

François Doyon La Rochelle:

There is a lot of jargon in what you just shared James.  Let me simplify this for our listeners. Surprisingly, not only do bonds generate very little real return, but there are periods when they can be volatile as we saw in 2022, when bond returns were negative.

Now for the fourth insight: “It hasn’t always been a smooth ride.”

James Parkyn:

Well, Francois, every investor knows that equities are volatile. That’s why we expect to get a higher return than investing in safer assets. The Yearbook highlights that investing in equities has proved rewarding over the long run. In an average year, the real return on US equities was 8.5%. The range of outcomes can be very wide. During the 125 years under study, there were 6 years with annual returns below negative 40%. And on the other hand, there were 6 years of returns over 40%.

François Doyon La Rochelle:

Now let’s move on to the fifth insight: “Patience has been valuable.”

James Parkyn:

As we all know, Francois, most investors are very afraid of deep bear markets. The Yearbook covers the four great bear markets since 1900, plotting their drawdown and recovery times. If we look at the last 25 years, for example: after the tech bubble burst in March 2000, US equity prices again collapsed and the full drawdown and recovery period lasted seven and a half years until July 2007. The subsequent Global Financial Crisis in 2008-2009 saw the market reach its bottom in February/early March 2009. The market took four years to recover from there.

François Doyon La Rochelle:

Indeed, James, that’s the time it took to recover from the bottom. But the full cycle of when it started dropping to when it recovered fully took 5.3 years. The worst period however was the great Wall Street crash that took 15.5 years to fully recover.

Moving on to the sixth insight: “Multi-asset diversification has helped manage volatility.”

James Parkyn:

That’s quite a bit of jargon, Francois. What they’re trying to highlight here is that diversification across asset classes has been a good way to reduce portfolio risk. What they are also talking about is the need to find assets whose returns are not always in sync. We addressed this topic of correlations of asset class returns two years ago after the terrible year in the bond Market in 2022.  The Yearbook shows the stock-bond correlation over time. Over the very long run, the stock-bond correlation has averaged 0.33 across countries and 0.19 in the US. This low correlation has provided good benefits for risk reduction by diversifying across stocks and bonds. But over the more recent shorter periods, from the late 1990s until 2021, stock-bond correlations were predominantly negative, which was kind of a free lunch for investors.

François Doyon La Rochelle:

However, as we have seen, the era of negative correlations came to an abrupt end in 2022 when stocks and bonds fell sharply together. But the Yearbook makes the case that over the longer term, bonds are positively correlated to stocks.

Next up, the seventh insight is: “There is a compelling case for diversification within equities.”

James Parkyn:

On the one hand, when markets have been deeply volatile, they tend to move together. But the Yearbook makes the case as it has in the past few years, for the potential risk reduction benefits from international diversification. The Yearbook shows that over the last 50 years, globally diversified portfolios generated higher Sharpe ratios than investing with domestic investments in the vast majority of countries. For our listeners, the Sharpe ratio is a measure of an investment’s risk-adjusted return, essentially indicating how much return the investment generates for each unit of risk taken.

François Doyon La Rochelle:

This has made total sense for Canadian-based investors, particularly if they have invested in the U.S. equity markets over the last 30 years. U.S. equities have outperformed Canadian equities.

Now for the eighth insight: “Inflation is also an important consideration in long-term returns.” It is often claimed that equities are a hedge against inflation. However, the Yearbook restates a fundamental fact: “… equities tend to perform especially well in real terms when inflation ran at a low level, while high inflation impaired real equity performance.”

James Parkyn:

The 2024 Yearbook also made this case, and I quote: “Equities have enjoyed excellent long-run returns, they are not and never have been the hedge against inflation that many observers have suggested. Rather, stocks should be seen as excellent inflation beaters due to the equity risk premium.

François Doyon La Rochelle:

James, we move on to the ninth insight: “Gold and commodities can play a role in hedging inflation.”

James Parkyn:

We have never been a fan of this as it is next to impossible to get products that are retail investor-friendly. Large Institutional money managers may add value by adding this asset class.

François Doyon La Rochelle:

I agree James.  And finally, the tenth insight is: “Factors have delivered long-term outperformance, but some styles have disappointed for years.”

James Parkyn:

We have been managing our client portfolios with Dimensional tools that capture Size, Value, and Profitability Factors.  The Yearbook states that “factors have outperformed broader equity markets over long time horizons.” However, it also states that “premiums can be negative, even over entire decades.”

François Doyon La Rochelle:

James, I agree with the Yearbook when it states: “Assessing whether factors will generate premiums in the future is a difficult call.”

James Parkyn:

We have seen in the last decade where Large Cap beat Small Cap and Growth beat Value.  The Yearbook again makes the case for factors based on the data going back to 1900. I quote: “Nonetheless, size, value, income, momentum, and volatility will continue to have an important impact on portfolio returns and should be monitored by all investors. They are important in performance analysis and evaluation, and in distinguishing between style returns and stock selection or timing skill.”

François Doyon La Rochelle:

It can take a while to benefit from factor Tilts. We’ve experienced it over the last several years. But as they say and I quote: “ The long run can take a very long time.”

James Parkyn:

Another point I would like to make Francois. There is an interesting statement in the Yearbook and I quote: “The 21st century is now 25 years old. Measured since the start of 2000, stock returns have been lower than over the 20th century, though global equity investors still enjoyed an annualized real return of 3.5% and an equity risk premium relative to T-bills of 4.3%.” We addressed it in last year’s podcast for the 2024 Yearbook review, that expected returns going forward would be lower. Investors need to appreciate that the long term in investing is much longer than they realize.

François Doyon La Rochelle:

Yes, James, investors need to understand that long term is not 10 to 20 years, it’s much longer than that.

Finally, James, what takeaways does the Yearbook have for our Listeners concerning Global diversification?

James Parkyn:

There is nothing new here Francois.  As we have often discussed in our Podcast, diversification is a key part of our investment discipline.  The power of diversification across stocks, markets, and asset classes helps to reduce but not eliminate risk.

Over the last 50 years, except for US-based investors, investing globally for investors led to better risk-adjusted returns than investing only in their home markets.

Reaping the benefits of diversification is a long-term strategy but it can let you down in the short term. The historically extreme negative returns in 2022 of the classic balanced 60/40 equity/bond allocation are the perfect recent example.

François Doyon La Rochelle:

Good investment decisions, based on sensible criteria, can sometimes have disappointing outcomes. This brings us back to James to the importance of a long-term perspective and with it an appreciation of the laws of risk and return.  I recommend that our listeners always consider their long-term goals, their risk profile, their ability to take risks, and their time horizon when building their portfolios.

James Parkyn:

As our Listeners well know, we have experienced four equity bear markets since 2000 and we need to be paid for taking risks. The risk premium for investing in stocks exists for a reason. It is a necessary payment for the risk of volatility and drawdown.

François Doyon La Rochelle:

I hope our Listeners have found our review of the UBS 2025 Global Returns Yearbook useful in helping them make smart decisions with their long-term money. We will make sure to put a link to the UBS Yearbook on this podcast’s page. And as we said at the outset of this Podcast, the value of the Yearbook is that it always comes back to the perspective of risk and reward, and the importance of diversification and asset allocation.  This, as our Regular Listeners know, is core to our Investment Philosophy.

• CONCLUSION

François Doyon La Rochelle:

Thank you, James, for your contribution again today.

James Parkyn:

My pleasure, François.

François Doyon La Rochelle:

That’s it for episode #75 of Capital Topics!

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