“The main lesson for investors is to reduce equity exposure when prices have been high, and when earnings have sustained abovenormal growth,” Marshman says. But over the course of market cycles, investors should realise that equity returns have a natural ceiling: real earnings’ growth, the primary driver of equity returns, is about 1 per cent below the rate of growth of gross domestic product (GDP). “We should never expect too much from equity returns, given that fundamental rule,” he says. The financial crisis has improved his outlook for equities. It took the heat out of market valuations, and spurred a charge into government bonds. “That strategy will reverse at some stage, providing a source of demand for equities,” he says. In the 10 years to December 2000, the S&P/ASX 200 returned 13.9 per cent, according to data from Mercer. It gained 8.4 per cent in the decade ending in December 2010.

Jeff Rogers, CIO at the $13 billion multi-manager ipac, overlooks the recent “bad patch” to say that at current valuations, an equity risk premium of between 6 and 7 per cent still exists. Investors just need to wait longer to experience it. “When we say equities will beat bonds in the long-term, what we’ve allowed our clients and maybe ourselves to believe is that the longterm is five-to-seven years.” A more realistic expectation could be as long as 20 years, he says, for the incremental gains made by equities over cycles to deliver a substantial premium above bonds. “The real learning is that 10 years isn’t long enough to be considered long-term.” While ipac’s expectation of how much return is embedded in markets remains unchanged, it puts the heat on investment professionals: “How much valueadd can we expect from managers?” At the $17 billion Sunsuper, CIO David Hartley is similarly focused on managers’ abilities.

He looks at the gains that can be made through buying and selling decisions rather than paying too much attention to broad market returns. “If you buy a good stock cheaply, it almost doesn’t matter what happens – you’re going to make money out of it. It depends on where the market is at the time, and what you pay for it. “The equity risk premium is not the primary factor that we look at. We’re more inclined to look at what GDP growth is going to be, what share of that is going to be earned by the listed markets and what we might be able to sell that for in 10 years’ time. “You’re looking at earnings growth. That translates into a premium, which can translate into a price/earnings multiple. You then ask if this valuation makes sense, given the environment.” This environment for investment is in flux. The financial crisis brutally ended the debtfuelled growth of major Western economies and made emerging markets more competitive.