Economic performance no guarantee of investment returns: Allan Gray

Research conducted by Orbis, Allan Gray’s global asset management partner, shows very little correlation between growth in real dividends per share over the 20th century and economic growth in 14 industrialised countries.

A common approach to investing is to start by looking for high-growth countries or industries in the belief that this will lead to a high-growth profit pool and result in strong investment returns for shareholders. 

However, research conducted by Orbis, Allan Gray’s global asset management partner, shows very little correlation between growth in real dividends per share over the 20^th century and economic growth in 14 industrialised countries.*

Real dividend growth per share was used as an indication of which areas would have been the best places to invest. Orbis focused on dividends rather than earnings largely because earnings are impacted by accounting changes over the years.  Focusing on per-share dividend growth strips out the influence of the number of listed businesses, and gives a good indication of the returns delivered to shareholders.

“The performance of the stock market is more closely related to earnings growth, with real per share dividend growth as a proxy, than GDP growth, which really indicates total revenue rather than the profit pool,” say Orbis analysts Jonathan Brodie and Trevor Black.

Japan, for example, enjoyed an annualised real GDP growth of 4.2% over the period; yet it had a negative average dividend growth of -3.3% per year. Other countries with a similar pattern of positive real GDP growth but negative dividend growth included Italy, Belgium, France, Germany, Spain, the Netherlands, Switzerland and Ireland.

Even in countries where both real GDP and dividend growth were positive such as Canada, the US, the UK and Australia, the disparities between the two growth rates were substantial. Overall, the correlation between these growth rates was actually slightly negative. Incidentally, South Africa performed at the top end of the scale in terms of real GDP growth and dividend growth, but languished in terms of real GDP per capita growth.

“If you could predict the winning economy over the next 100 years it’s not clear that this would be any help in directing your investments,” according to Brodie and Black.

Nor would predicting the winning industry be of much use, they said. This was demonstrated last year in research by Orbis Australia director Simon Marais, who is also Allan Gray’s chairman. By contrasting the performance of shares in the technology and tobacco industries globally over the past 35 years, Marais showed that even correct predictions regarding the future of a particular industry would not have resulted in profitable investment decisions.

“Rather than overall economic conditions or even industry trends, the profit and return performance of an individual company is determined more by the competitive landscape,” say Brodie and Black. In a rapidly growing economy the profit ‘cake’ may grow quickly; but increased competition may mean a particular company’s slice doesn’t grow at all, and may well be undercut entirely by newcomers.  On the other hand, a stagnating economy or industry doesn’t attract as many entrepreneurs, so there is little new competition and some players leave the industry, leading to better margins for incumbents.

“One of the most under-appreciated facts about financial market research is that it’s not only the growth in your markets that is important; even more significant is the growth in the competition you face.  This is the part of the equation where careful research and conviction can really pay off over time,” Brodie and Black conclude.

*Japan, Italy, Denmark, Belgium, Germany, France, Ireland, Spain, Netherlands, Switzerland, Canada, United Kingdom, United States, Australia, South Africa and Sweden.

“One of the most under-appreciated facts about financial market research is that it’s not only the growth in your markets that is important; even more significant is the growth in the competition you face.  This is the part of the equation where careful research and conviction can really pay off over time,” Brodie and Black conclude.

*Japan, Italy, Denmark, Belgium, Germany, France, Ireland, Spain, Netherlands, Switzerland, Canada, United Kingdom, United States, Australia, South Africa and Sweden.

“One of the most under-appreciated facts about financial market research is that it’s not only the growth in your markets that is important; even more significant is the growth in the competition you face.  This is the part of the equation where careful research and conviction can really pay off over time,” Brodie and Black conclude.

*Japan, Italy, Denmark, Belgium, Germany, France, Ireland, Spain, Netherlands, Switzerland, Canada, United Kingdom, United States, Australia, South Africa and Sweden.

“One of the most under-appreciated facts about financial market research is that it’s not only the growth in your markets that is important; even more significant is the growth in the competition you face.  This is the part of the equation where careful research and conviction can really pay off over time,” Brodie and Black conclude.

*Japan, Italy, Denmark, Belgium, Germany, France, Ireland, Spain, Netherlands, Switzerland, Canada, United Kingdom, United States, Australia, South Africa and Sweden.

“One of the most under-appreciated facts about financial market research is that it’s not only the growth in your markets that is important; even more significant is the growth in the competition you face.  This is the part of the equation where careful research and conviction can really pay off over time,” Brodie and Black conclude.

*Japan, Italy, Denmark, Belgium, Germany, France, Ireland, Spain, Netherlands, Switzerland, Canada, United Kingdom, United States, Australia, South Africa and Sweden.