The compounding effects of share buybacks, since the 1980s, have been identified as the critical factor enabling the US equity market to outperform Europe on a 100+ year basis, according to analysis presented at the latest quarterly investment meeting of The Group of Boutique Fund Managers (GBAM).

This, GBAM said, was a significant view, given the announcement by BP to boost its buyback programme by $2.5 billion, and, with the largest proportion of European companies in history set to pursue buybacks, investor returns from the region may start to outperform the US in coming years.

Outlined by Hlelo Giyose, chief investment officer and deputy executive chairman of Johannesburg-based First Avenue Investment Management, the analysis sought to establish the primacy of share buy backs (capital allocation) in stock selection in a world where global investors are tactically switching between US and European equities.

While comparing the Stoxx 600 and S&P 500 indices for those considering tactical switching, the analysis referenced both longer and nearer-term time periods: 1900-2011, 1988-2011, and 2010-19.

Factors dismissed as insufficient to explain the levels of performance differentials over time include:

- Earnings growth rates

- Sector composition and weighting

- Notional P/E ratios

- Impact of differences in depreciation accounting between US GAAP vs IFRS on REITS and consumer discretionary sectors

Data for both Europe and the US since January 2021 points to stronger returns from indices such as the Solactive European Buyback and S&P 500 Buyback, compared to the Stoxx Europe Select Dividend 30 or the S&P 500 Dividends Aristocrats.

Mr Giyose said: “What is really intriguing here is that the bulk of the difference in returns between the United States and Europe can be explained by companies more consistently allocating capital to one particular factor, which is share buybacks.

“Thinking about Shell and BP and Total, they are in a tough position. But let us say there was no war, and no supply constraints. If they were following ESG principles by reducing production of fossil fuels and were increasing renewable energy and buying shares back and trading at 5.7 percent dividend yields, they would be outstanding investments.

“Paying dividends is one thing. But buying shares back is far superior to just paying shares back. Companies also buying shares back on a consistent basis over a certain period of time outperform companies that just pay dividends.

 “Buying and removing 10 percent of the shares in issue compounds at a much faster rate than being paid a dividend every year.”