January 19

Asset allocation quilt – the winners and losers of the last 10 years

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Deep in the winter, there’s nothing like snuggling up with an asset allocation quilt. Investing’s most colourful data dump ranks the main asset classes (and sub-asset classes) by annual return. The result is a patchwork of good and sorry fortune. 

As you scan its riot of colour, the asset allocation quilt always poses the same question: could you have picked these winners and losers in advance?

Is there a predictable pattern coded into this crazy Super Collapse-style tile game? Or is it all so random that a passive investing strategy is best?

Go passive and you won’t ever see your initials in the Hall of Fame. But neither will you lose all your lives…

Asset allocation quilt 2021

Our American chums have this asset allocation quilt business all sewn up.

But we decided it was time for a British cut!

So here’s the rankings for the main equity, bond, and commodity sub-asset classes from 2012 to 2021 (plus 10-year annualised returns to boot) from the perspective of a UK pound sterling investor:

A table of annual returns for 12 sub asset classes over the last decade.
  • We’ve sourced annual returns from publicly available ETFs that represent each sub-asset class.
  • The data is courtesy of justETF – an excellent ETF finder, screener, and portfolio building service.
  • Returns are nominal1. Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.

Stitch up

Aside from being the worst pullover pattern ever, this quilt’s standout feature is the exceptional performance of the S&P 500 over the past decade.

Indeed US equities achieved a podium place in nine out of ten years.

That record is:

  1. Amazingly consistent
  2. Potentially consequential for the next 10 years

The relentless rise of the S&P 500 has led directly to expectations of doom for US returns. Think of a ‘you’ve had it too good, for too long’ morality play, backed by numbers.

Like many we’ve sounded the alarm about this for a while. I recently rebalanced the Slow & Steady portfolio, taking some profit from US gains.

Global equities have also been a consistent performer – not too surprising given the asset class is more than 50% weighted towards those same all-star US stocks. Global equities have not claimed the top two positions these last ten years, but they have lodged in a narrow band between third and sixth place.

The upshot is a fine advert for diversification. Global equities benefited from US exposure. But the other weightings didn’t drag them down too badly – and they might someday be a lifejacket if US shares start to sink under the weight of their expectations.

Meanwhile the UK equity experience has been a very British tale of class division. Except here the little guys beat the big boys! The mid-cap FTSE 250 firms trounced the international large caps of the FTSE 100.

The FTSE 100 is one of the poorest performing markets of the past decade. Sadly its sleepy constituents also dominate the passive investor’s go-to UK index: the FTSE All-Share.

Is there a case then for upping your exposure to the more domestic FTSE 250? It’s tempting.

But if you do it simply on the basis of the last ten years then beware of mean reversion – the market’s tendency to backhand anyone who reads too much into recent results.

King of the swingers

The Emerging Markets reputation for wild volatility is woven into our quilt in violet checks.

Almost every year, this geographic catch-all has either shot out the lights or shot itself in the foot.

Technically, most of us should probably have more Emerging Markets than the typical 5-11% slice present in leading global tracker funds.

That’s because in theory our asset allocation should align to the world economy.

But China alone accounts for 18% of the global GDP pie, according to this infographic.

I’m in no rush to up my allocation.

Rocket fool

Fans of violent volatility will also love the broad commodities2 asset class picked out in orange.

This one looks like a failed rocket programme. Stuck on the launchpad for the first four years, broad commodities bursts into life with a meteoric 30% lift-off in 2016.

It then does an immediate 180-degrees and tombstones straight back down in 2017.

A couple of hiccups later and commodities goes stratospheric again – rising over 40% in 2021 like a pillar of flame.

I suspect the asset class will remain on top of the world for about as long as the next Virgin Galactic flight.

Over the decade, broad commodities are the only asset class to hand in a negative nominal annualised return (-1.3%).

Subtract inflation for the real, wealth-sucking, return.

Trading places

Take notice of how the multi-coloured mayhem settles into a more familiar pattern when viewed via the rightmost ten-year annualised returns.

Bonds are towards the bottom of the heap, gold does even worse, and we should expect commodity future funds to deliver bond-like returns (with equity-style volatility) so that looks about right, too.

Equities sit atop the ten-year column just as prime slabs of capital should.

But the divergent outcomes among the different equity sub-categories show why we need all sorts in our mix.

Long-term investing is a game of sliding blocks. The S&P 500 could easily trade places with the Emerging Markets or even the FTSE 100 in the next decade.

The common thread here is expected asset class behaviour. Over time equities should do well but we don’t know how the sub asset-classes will stack up. Meanwhile, the other asset classes are there to patch up the holes when bad years for equities leave our portfolios needing stitches.

Take it steady,

The Accumulator

  1. That is to say they are not adjusted for inflation.
  2. Broad commodities are represented here by a diversified commodity ETF that gains exposure via commodity futures rather than the spot price. The broad commodities category includes energy, agriculture, livestock, industrial and precious metals

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