BVR received the following question from a 2011 Duff & Phelps Risk Premium Report buyer:
Has anyone commented on the notable increases in the Data in Exhibits A, B & D Smoothed Premiums over the 2009 results? I am looking at 25th ranks and see many 1 to 2 percentage point increases over last year's comparable numbers. I understand things changed a bit and I do not know the details. But comparing 2010's Exhibit A-3 for 25th of 13.5% to 2009's Summary Schedule 1, 5 year average net income of 11.4% for the 25th rank by size is a whopping 18.4% increase year over year. Similar increases can be seen in most of those rank level changes from 2009. Did I miss an explanation somewhere? Year over year differences are typically pretty small.
Jim Harrington (Duff and Phelps) responded:
Customer is correct. Risk premia increased year to year. But the higher risk premia may be what one would expect. Average return of the portfolios has been up significantly recently, while the average bond (income) return has been mildly trending downward (but mostly static).
Even “large company stocks,” as measured by the S&P 500 index in the SBBI (which we would expect to have lower returns than the smallest stocks) have gone from an average return of 10.9% to 11.3% as measured over the 1963 to present historical period in just a few years. That is indeed a big bump considering we are measuring an AVERAGE annual return over 48 years (as of the 2011 Report). But, considering that S&P showed a total annual return of negative 37.00% in 2008, and then two years of very strong returns (26.46% in 2009 and 15.06% in 2010), it is not unexpected that we see this “tail wagging the dog” effect of the last few years’ volatility
The 2011 Duff & Phelps Risk Premium Report is now available, along with two free videos: James Harrington's live tour of the Duff & Phelps Risk Premium Calculator from his February 18, 2011 webinar and Roger Grabowski's presentation of the 2011 edition of the Duff & Phelps Risk Premium Report from his March 3, 2011 webinar, and extensive documentation – all available here.