Investment in equities is the safest way for employees to safeguard a steady return on pension funds in the years ahead. Or at least it is if history is anything to go by.

An unusual long-term study of Irish investment markets entitled From Canals to Computers by Shane Whelan of Friends First, shows that over the last century real returns from equities have consistently outperformed bonds, due to growth in corporate profits and a major increase in the capital available for risky ventures.

Mr Whelan states that equities outperformed bonds and cash this century partly because of a policy approach by governments which is unlikely to change in the near future.

"The management of most western nations has evolved this century to become a tacit partnership, with it being in everybody's interest to ensure that companies deliver returns on average above gilts," says Mr Whelan. "Each of the three partners gets what they want - the government gets elected, the worker gets a decent job, and the capitalist gets a return higher than the alternative investments of gilts or cash," he says. "Basically equity returns have been engineered to be higher than gilt returns, and engineered to everybody's satisfaction." According to his thesis, governments now ensure that companies do well through capital grants, subsidies and taxation breaks, so that they then reinvest and create more employment for the electorate - who in turn support the government's policies. While this may appear to construe cronyism between government and capitalists "there is no triumph of capitalism," Mr Whelan says. "The outcome could equally well be construed as a worker's victory with labour, through pension fund investment, now owning most of the mobile capital in our economy and delegating the key investment decision to a multitude of self-motivated and hard-working entrepreneurs."

So what about the figures? Most people are familiar with the short-term performance of equities. Real Return from investment in the equity market in the 10 years to 1998 was 14.4 per cent per annum far outstripping returns of 9 per cent and 5.7 per cent per annum from the Government bond and cash markets respectively.

Even taking a much longer term view, equities fare best. The real return in the average decade since 1783 for equities has been consistently higher - at 6.1 per cent per annum - than gilts and cash, which only produced an average 2.4 per cent return per annum.

The only other investment option which has promised a strong return in recent years seems to be commercial property which last gave returns of 35.7 per cent from 23 per cent increase in 1997. Since 1970, returns from commercial property have averaged 11.73 per cent per annum. But investors should realise that the market can be volatile, with returns decreasing in the mid 1970s and 1980s.

Equities too, of course, can be volatile. But the long-term pattern is that equities have significantly outperformed all other asset classes over the long term. Since the end of the first World War, equities have outperformed gilts 94 per cent of the time. The worst year in the last hundred was 1974, the first oil crisis, when inflation reached 20 per cent and Irish equities halved in value. The best year was 1977, when equities doubled in value.

And one final lesson from history - don't put all your eggs in one basket. Back in the late 18th century, when the Irish Stock Exchange was set up, the three main shares were Bank of Ireland, the Grand Canal and the Royal Canal. The Royal Canal quickly ran into financial overruns, eventually going bust in 1813 and while the Grand Canal fared better, it never generated a strong return. Those who put a few bob in the Bank of Ireland did well, of course. The lesson for the longterm investor is to hold a wide spread of investments.