News Releases

The Barclays Capital Equity Gilt Study 2008 examines:

• How rising prosperity in the developing world has altered the relationship between inflation and growth
• Whether high levels of leverage can persist in a more volatile and inflation prone economic environment
• The demons of illusion that significantly impair the potential of portfolios to deliver returns
• Over a century’s worth of market returns data for the US and UK

Barclays Capital, the investment banking division of Barclays Bank PLC, is pleased to announce the publication of its 2008 Equity Gilt Study, one of the oldest and most respected continually published research documents in the City.

“This year we examine the very important relationship between inflation and economic leverage. We comment on the generally positive performance of hedge funds last year and our colleagues at Barclays Global Investors talk about factors that can reduce portfolio efficiency. We recommend long term investors plan and supplement hedging strategies to protect the value of their portfolios from the damaging effects of inflation and heightened volatility,” commented Tim Bond, Head of Asset Allocation at Barclays Capital.

Highlights of this year’s edition include:

For richer, for poorer – Resource scarcity is the single most important social, political and economic factor of our era and will remain so for the foreseeable future. The Equity Gilt Study examines how resource scarcity is likely to wreak significant changes to the global economy, ending the long-term trend of decreasing volatility in growth and inflation. The net result of intensifying natural resource scarcity is an increase in structural upward pressures on inflation and a worsening trade-off between inflation and growth.

Asset Returns – In the UK, cash was the best performing asset returning 1.8% after inflation. Equities posted a lacklustre performance underperforming bonds in the UK and US. Equity and corporate bond performance was damaged by the summer credit squeeze, while government  bond returns were weak in the face of rising monetary policy pressure in the first half of 2007. In the US, equities managed to outperform cash, however, stocks lagged behind nominal and index linked bonds.

 

For further information, please contact:

Janine Campling, Assistant to Head of Asset Allocation                    +44 (0) 20 7773 2485

Catherine Shields, Barclays Capital Communications                         +44 (0) 20 7773 8939

 

-ENDS-

 

NOTES TO EDITORS

The Equity Gilt Study

The Equity Gilt Study has been published annually since 1956. The 2008 Equity Gilt Study is the 53rd annual edition of Barclays Capital’s flagship publication. The study provides data and analysis of the annual returns in equities, government bonds and cash from the end of 1899 for the UK, and from the end of 1925 for the US. The US data is kindly provided by the Center for Research in Security Prices at the University of Chicago Graduate School of Business. Shorter histories of UK data are also presented for index-linked gilts and corporate bonds.

The highlights of the 2008 edition of the Equity Gilt Study are presented below in chapter order.

Chapter 1 –For richer, for poorer

Resource scarcity is the single most important social, political and economic factor of our era and will remain so for the foreseeable future. We are depleting the global stock of natural resources - in the broadest sense of that term - at an accelerating pace. This process is creating negative feedback in the shape of rising real resource prices and a degenerating ecosystem, in turn catalysing changes to the fundamental structure of the economy. The rise in per capita consumption of natural resources has been vastly accelerated by rising prosperity in the developing economies. The scale of the potential increase in aggregate demand is large enough to warrant doubts that it can be satisfied. In many, if not most, instances, the more accessible stocks of resources have already been exploited. Increasingly, future demand will only be met by utilising the less productive and more marginal stocks. Given the pace of economic growth in the developing world, the supply/demand balance in most resources becomes critical within a one to two decade timetable. For some resource sectors, the prospect of complete exhaustion within this timeframe is a realistic scenario if hypothesised deposits and technological advances disappoint. Resource scarcity is likely to wreak significant changes to the global economy, ending the long trend of decreasing volatility in growth and inflation. These changes have profound implications for investors, as consumption and investment patterns adjust to the new reality.

Chapter 2 –An inefficient arrangement

The net result of intensifying natural resource scarcities is an increase in structural upward pressures on inflation and a worsening trade-off between inflation and growth. To prevent the inception of an inflationary spiral, in the future, monetary policy-makers will have to become somewhat tougher than has been the case over the past two decades. In particular, central banks will be more constrained in dealing with the aftermath of speculative bubbles and phases of excess leverage. Macroeconomic volatility is therefore likely to rise as policy-makers find their ability to smooth the cycle constrained by inflation. In time, this development will break the familiar cycle of the past two decades, under which the seeds of each new speculative bubble germinate in the ashes of the previous bubble. Leverage levels, notably in the household sectors of developed economies, will most likely start a long drift lower. In this context, the credit crisis of 2007-08 is not just another permutation of the leveraged boom and bust cycles that have been so familiar over the past two decades. Rather, the current credit crunch represents the death throes of a rather inefficient economic arrangement that was only sustainable under disinflationary conditions.

Chapter 3 – The four demons

There are four demons of illusion that significantly impair the potential of portfolios to deliver returns. These demons limit the risk control benefits of diversification. The first demon has us focus on the asset part of the portfolio ignoring the liability portfolio. The second demon distorts the perception of diversification by focusing on capital allocation, thereby masking the underlying economic exposure. The third demon, asset class focus, is damning because it inserts an opaque layer between how a portfolio is implemented, along asset class lines, and the key tenets of investing, which are to bear risks that are rewarded and employ diversification to manage these risks. The fourth demon, leverage, challenges us to re-examine our portfolios in terms of implicit and explicit leverage. These four demons each work to limit investors’ ability to harness the power of diversification and obscure the focus on the investment problem. The good news is that they can be tamed. It requires that we change our perspective to expose the demons and see past their illusions. With the newfound clarity we can then address the investment problem with our most powerful tools, the basics of investing and the power of diversification.

Chapter 4 – A quant’s crisis

Hedge funds continued to post double digit returns during 2007, an impressive feat given the backdrop of market turbulence. However, sharp losses were experienced during August in the wake of the credit turmoil. A few high-profile funds experienced losses of over 20% in just one month, which raised questions over the ability to navigate through a financial crisis. In particular some of the worst performers during the summer months seem to be quantitative funds. In this essay, we examine whether particular investment styles or strategies may be more able to navigate through financial shocks. Is there a deeper issue of certain strategies creating market distortions that intensify crisis? And how can investment strategies evolve in order to reduce the chance of a computerised storm? Given that market volatility is likely to continue over the coming year, we present an example of a forward looking model that may help navigate through financial turmoil.

Chapter 5 and 6 - Asset Returns

We publish last year’s US and UK asset returns, placing them within a historical context. Equities posted a lacklustre performance underperforming bonds in both the UK and US. In the UK cash was the best performing asset returning 1.8% after inflation. Equities returned just 1%, against 1.2% for gilts, 1.4% for index linked and minus-6% for corporate bonds. Equity and corporate bond performance were damaged by the summer credit squeeze, while government bond returns were weak in the face of rising monetary policy in the first half of 2007. In the US equities managed to outperform cash with 3.2% real return against 0.6% for cash. However, stocks lagged behind nominal and index linked bonds which returned 5.2% and 8.1%, respectively.

About Barclays Capital

Barclays Capital is the investment banking division of Barclays Bank PLC which has an AA long-term credit rating and a balance sheet of over £1.1 trillion. With a distinctive business model, Barclays Capital provides large corporate, government and institutional clients with solutions to their financing and risk management needs.  Barclays Capital has offices in 26 countries, employs over 15,700 people and has the global reach and distribution power to meet the needs of issuers and investors worldwide.

Barclays Capital - the investment banking division of Barclays Bank PLC. Registered in England 1026167. Registered office 1 Churchill Place, London, E14 5HP. Authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange

About Barclays Global Investors

Barclays Global Investors is the world's largest asset manager⁽¹⁾  and a leading global provider of investment management products and services. It had over 2,900 institutional clients in 52 countries around the world and over $2.0 trillion of assets under management as of December 31 2007. It transformed the investment industry by creating the first index strategy in 1971 and the first quantitative active strategy in 1979. BGI is the global product leader in Exchange Traded Funds (ETFs) through its iShares® brand with over 190 ETFs globally and over $400bn in AUM as at December 31 2007. 

For further information about Barclays Global Investors, please visit our website www.barclaysglobal.com.

Contacts:

Barclays Global Investors

Maxi Freeman +44 (0)20 7668 7387             

maxi.freeman@barclaysglobal.com

Financial Dynamics

Keren Perrott +44 (0)20 7269 7218            

keren.perrott@fd.com

⁽¹⁾ Source: Global Investor Top 100, December 2007