1. Valuation Campbell R. Harvey, Ph.D., Professor, Duke University

2. The Plan International track record Returns and diversification
Long horizon vs. short horizon
What can we expect from U.S. equities?
What to expect from international?
Alternative views: dynamic strategies, hedge funds
Research frontier – changing views of diversification
Importance of GPR

3. The Track Record Investments Source: Erb and Harvey (2002)
Wilshire Mid Cap
Thirty Year Treasury STRIP
Twenty Year Treasury STRIP
Wilshire Large Cap
Wilshire 5000
Ten Year Treasury STRIP
EAFE X-Japan
Wilshire Small Cap
Seven Year Treasury STRIP
MBS
Credit
Five Year Treasury STRIP
Aggregate
Government
EAFE
Three Year Treasury STRIP
Two Year STRIP
One Year Treasury STRIP
Source: Erb and Harvey (2002)

4. Returns and Diversification
Data from MSCI

5. Returns and Diversification
Data from MSCI

6. The Long Horizon
Data from Dimson, Marsh and Stauton (2002)

7. What to Expect
Data from Dimson, Marsh and Stauton (2002)

8. What to Expect
Source: Goldman Sachs (2002)

9. What to Expect
Ten-year risk premium around 3.5% and stable whereas one-year risk premium quite variable
10-year premium
1-year premium
Source: Graham and Harvey (2002)

10. What to Expect U.S. Equity and Bond Returns are Positively Correlated
Source: Erb and Harvey (2002)

11. What to Expect
World Real Equity and Real Bond Returns are Positively Correlated
Source: Erb and Harvey (2002)

12. What to Expect Inflation Negatively Related to Real Bill Returns
Source: Erb and Harvey (2002)

13. What to Expect
Inflation Negatively Related to Real Intermediate Bond Returns
Source: Erb and Harvey (2002)

14. What to Expect Inflation Negatively Related to Real Bond Returns
Source: Erb and Harvey (2002)

15. What to Expect Inflation Negatively Related to Real Equity Returns
Source: Erb and Harvey (2002)

16. U.S. Has Become a Riskier Global Investment
The U.S. has become much more risky
High sensitivity to some GPRs
Disagreement on strength of economy
Financial information less credible
These factors suggest shifting exposures from equity to safer fixed income

17. U.S. Has Become a Riskier Global Investment
ICRG
Political Risk
Data from PRS

18. U.S. Has Become a Riskier Global Investment
ICRG
Political Risk
Data from PRS

19. U.S. Has Become a Riskier Global Investment
ICRG
Political Risk
Data from PRS

20. U.S. Has Become a Riskier Global Investment
Risk Ratings December 2002
Data from PRS

21. U.S. Has Become a Riskier Global Investment
Risk Ratings May 2001
Data from PRS

22. Conclusions
International investment is mainly about returns – diversification, while important, is often “oversold”
Expected returns depend on fundamental values today – not just historical return performance.
U.S. risk has increased suggesting a reallocation from equity to fixed income

23. All articles on www.duke.edu/~charvey
Readings
All articles on
The Drivers of Expected Returns in International Markets (2000)
Global Tactical Asset Allocation (2001) with Magnus Dahlquist
The Term Structure of Equity Risk Premia (2002) with Claude Erb