What Really Drives Equity Performance?

Research* shows that there are three factors that determine the returns from Shares in the long term, and two factors that determine returns from fixed interest, as follows:-

Shares

Market  - Shares generally have higher expected returns than fixed interest.
Size  - Small company shares generally have higher expected returns than large company shares.
Price - Lower-priced "value" shares have higher expected returns than higher-priced "growth" shares.

Fixed Interest Securities

Maturity Longer-term instruments are riskier than shorter-term instruments.
Default Instruments of lower credit quality are riskier than instruments
of higher credit quality.

* Source “The Cross Section of Expected Stock Returns,” Journal of Finance 47, no.2 (June 1992):427-65.

So what does this mean and why is it relevant?

According to the Dimensional 2009 Matrix book of returns, £1 invested
between 1956 and 2008 would have grown to:-

£363 if it was invested in the FTSE All-Share

£1,663 if it was invested in Smaller Companies

£2182 if it were invested in Value Companies.

(Small & Value Companies data provided by Dimensional using thrid third party indices).

BPH Wealth Management's  Passive Approach recognises these different asset classes and identifies which have historically outperformed and weights the portfolio accordingly.