Bonds beat shares over 10 years

SHARES returns were beaten by those from bonds over the past 10 years, according to an influential study. The findings challenge the accepted view that the stock market is the best place for investors‘ money over the long term.

The annual Barclays Capital Equity-Gilt Study found that UK shares delivered real annual returns – actual gains after inflation is stripped out – of 8.6% over the past decade compared to 9.6% from corporate bonds.

Bonds opened up an even greater lead last year when they delivered a return of 6% compared with a 13.6% fall in shares. Falling interest rates last year - from 6% to 4% - gave a boost to bonds. As rates fall so do the returns from savings accounts driving investors to the relative attraction of bonds.

The same factor also may help explain strong bond performance in the Nineties when interest rates saw a gradual decline after two decades of relatively high levels.

However, Barclays Capital also says a change in accounting rules for pension funds and pressure on their managers to be able to cater for large numbers members about to retire has forced more of them to switch from shares to bonds. The highest profile example was Boots last year.

Barclays believes this trend will continue and too many investors chasing too few bonds will give a further short-term boost to the asset class.

At the same time, predictions of low inflation for the foreseeable future will leave less scope for companies to pump up their profits with rising prices and with it, their share prices. For example, many companies were able to deliver big share returns in the Eighties thanks to high inflation. Returns for this decade are predicted to be 5% to 8%.

Fred Cleary, Barclays‘ associate director on interest rate strategy, said: ?It will continue to be a closer run thing between bonds and equities in this decade.‘