Triumph of the Optimists: 101 Years of Global Investment Returns

By Elroy Dimson; Paul Marsh et al. | Go to book overview

Chapter 32 United Kingdom

For the United Kingdom, it was clear that there was a need for a long and consistently compiled equity return series. With support from ABN AMRO, we therefore created a new index that adheres to the guidelines presented in section 3.1. The basis for our study of the UK market is a database that comprises two elements. To compile share prices for the period starting in 1955, we use the fully representative record of equity prices maintained by London Business School. This database covers several thousand shares, and is described in Dimson and Marsh (1983). The London Share Price Database (the LSPD) provides reliable measures of stock market returns, which cover most of the second half of the century. We refer the reader to our article in the Journal of Business (Dimson and Marsh, 2001) for details on our comprehensive UK index histories for the period from 1955 to date.

The period from 1899 to 1954 presented a rather different challenge. Rather than accepting a standard back-history at face value, we took on the painstaking process of collecting share prices from old issues of the Financial Times from 1899 onward. This enabled us to calculate an index of the returns from the top 100 companies over the period from New Year 1900 to the end of 1954. The companies that enter the index are included without reference to whether they survive after entering the index. The index resembles the FTSE 100 in its method of construction. Our new value-weighted equity index contains the hundred companies that, before the start of each year, have the largest market capitalization for their ordinary or deferred shares. For the entire 101 years, we follow the same criteria for index membership: inclusion of UK companies with ordinary or deferred shares, and omission of companies with non-UK registration/head office. We exclude preference shares.

The first stage was to identify a list of shares that were eligible for investment. To avoid any upward returns bias, this had to be a set of firms that existed at each point in time, and which had not been screened for subsequent survival. Our definition of the companies eligible for inclusion was based on those with stock prices published in the Financial Times (FT) for 1899–1954, and in the Stock Exchange Daily Official List (SEDOL) for 1955–99.

For the earlier period, we constructed a cross-section of all shares with prices quoted in the FT on the last trading day of 1899, 1909, 1918, 1927, 1936, and 1945. Despite omission from the end-1899 and end-1909 FTs, the banking and insurance sectors were included in our index series, based on SEDOL prices. The reason for doing this is that the banking and insurance sectors appeared regularly, though not daily, in the FT. Note also that in 1899 and 1909 smaller mining shares were excluded. The number of shares in our pre-1955 cross-section rose from 247 in 1899 (when SEDOL contained 783 shares) to 604 in 1954 (when SEDOL contained 3,789 shares). Compared to the full list of companies in SEDOL, our sample covers a minority by number but a substantial majority by value of all quoted companies.

Share prices before 1955 were taken as the average of bid and offer prices for the last trading day of the year as quoted in the FT. Very occasionally, where necessary, other prices were taken from SEDOL. Year-end prices for 1914 were taken from January 4, 1915, the first day of trading after the closure of the Stock Exchange following the outbreak of the First World War.

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Triumph of the Optimists: 101 Years of Global Investment Returns
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface xi
  • Part One- 101 Years of Global Investment Returns 1
  • Chapter 1- Introduction and Overview 3
  • Chapter 2- World Markets- Today and Yesterday 11
  • Chapter 3- Measuring Long-Term Returns 34
  • Chapter 4- International Capital Market History 45
  • Chapter 5- Inflation, Interest Rates, and Bill Returns 63
  • Chapter 6- Bond Returns 74
  • Chapter 7- Exchange Rates and Common-Currency Returns 91
  • Chapter 8- International Investment 105
  • Chapter 9- Size Effects and Seasonality in Stock Returns 124
  • Chapter 10- Value and Growth in Stock Returns 139
  • Chapter 11- Equity Dividends 149
  • Chapter 12- The Equity Risk Premium 163
  • Chapter 13- The Prospective Risk Premium 176
  • Chapter 14- Implications for Investors 195
  • Chapter 15- Implications for Companies 211
  • Chapter 16- Conclusion 220
  • Part Two- Sixteen Countries, One World 225
  • Chapter 17- Our Global Database 227
  • Chapter 18- Australia 229
  • Chapter 19- Belgium 234
  • Chapter 20- Canada 239
  • Chapter 21- Denmark 244
  • Chapter 22- France 249
  • Chapter 23- Germany 254
  • Chapter 24- Ireland 259
  • Chapter 25- Italy 264
  • Chapter 26- Japan 269
  • Chapter 27- Netherlands 274
  • Chapter 28- South Africa 279
  • Chapter 29- Spain 284
  • Chapter 30- Sweden 289
  • Chapter 31- Switzerland 294
  • Chapter 32- United Kingdom 299
  • Chapter 33- United States 306
  • Chapter 34- World 311
  • References 316
  • About the Authors 331
  • Index 333
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