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28 February 2019

Total Market Return (TMR) – Review of UKRN conclusions, historical trends and forward-looking evidence. 28 February 2019. Richard Hern. Total Market Return (TMR) proposed in recent regulatory documents have been consistently lower than CMA NIE 2014 decision.

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28 February 2019

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  1. Total Market Return (TMR) – Review of UKRN conclusions, historical trends and forward-looking evidence • 28 February 2019 • Richard Hern

  2. Total Market Return (TMR) proposed in recent regulatory documents have been consistently lower than CMA NIE 2014 decision

  3. But has the UK TMR really declined over time? Historical data on UK realized returns does not suggest it has

  4. Other major global equity markets show no discernible decline in realised returns over the recent period US equity market returns • Germany equity market returns • Japan equity market returns • France equity market returns

  5. Forward Looking data from the Bank of England also shows no evidence that the TMR has declined over the last 10-20 years (absent “crisis” periods)

  6. Bloomberg’s UK Real Market Return Calculated Using the DDM Does Not Show a Declining Trend

  7. Even PwC’s own DGM Does Not Show a Declining Trend in the TMR

  8. Survey Evidence from Fernandez Does Not Show a Trend Decline in TMR

  9. Forward Looking Models used by many UK regulators to justify a lower TMR are using UK GDP forecasts as the basis for estimating investors’ expectations of future earnings. But do investors really base their forecasts of future earnings for FTSE stocks on UK GDP forecasts? • If the DGM Models are re-estimated using analysts’ forecasts of future earnings, the TMR increases by over 1.5% “valuation tests …. offered strong evidence that investors place the greatest weight on forecasts from Institutional Brokers of Analysts” p.95 Patterson, The Cost of Capital.

  10. The UKRN 2018 report advocates using a TMR of 5-6% based on historical returns deflated by a constructed “CPI” series Conclusion: it is far from clear that the TMR has fallen since the CMA’s estimate of 6.5% in 2014

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