As a financial advisor, RIA, or investment manager, you are sure to have seen and or used some version of a performance quilt chart to show that the best performing asset class one year may be at the bottom the next – or in the middle, or forgotten.
The principal, as always, has been to show that you can’t predict the market, you can’t be invested in just one or two asset classes, and must therefore diversify.
But the classic table only shows numbers, not magnitude.
The Periodic Table of Investment Returns
See the “classic” color-coded periodic table below, popularized and produced by Callan Associates, which shows the relative annual total return performance of ten broad asset classes for the 20 years ended 2015. (See here for expanded view.)
As always, past performance does not guarantee future similar results. And: Forex trading, commodity trading, managed futures, other alternative investments, and international and domestic stocks are complex and carry a risk of substantial losses. Not all investments are suitable for all investors. Investors and their advisors must exercise skill and judgment in making investment decisions.
The asset classes show above include U.S. domestic categories with billions in total assets, such as large cap stocks, high yield bonds, and REITs; and even broader categories as hedge funds and cash.
Each category, of course, may have dozens or more subcategories with finer distinctions (and varying returns), such as, in the hedge fund category, long-short funds, global macro funds, and mergers and acquisition funds.
Nevertheless, the performance table serves as a shorthand for “Hey, performance varies by category!”
Variations in Magnitude
What the periodic tables don’t show you, your clients, and prospects is the magnitude of the ups and downs, gains and losses of various asset classes versus each other.
RCM Alternatives, a Chicago-based firm that helps investors and investment managers set up and trade alternative investment accounts, has fixed it for us.
In the RCM chart, you can see, for example, that 2009 was a very good relative year, as a bounce-back from the bad days of 2008: emerging markets, as represented by the Emerging Markets MSCI Index, were up 79% for the year, the top category represented. By contrast, the high yield bonds as a category gained a mere 6% for the year.
Note also how comparatively bunched up returns by category were for 2015, with a total spread of about 26% from highest to lowest.
Some Disclosure Detail
Barclays Aggregate Bond Index includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
Barclays High Yield Bond Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
MSCI Emerging Markets is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 23 emerging countries around the world.
Russell 2000 measures the performance of small capitalization U.S. stocks. The Russell 2000 is a market-value-weighted index of the 2,000 smallest stocks in the broad-market Russell 3000 Index.
Russell 2000 Value and Russell 2000 Growth measure the performance of the growth and value styles of investing in small cap U.S. stocks. The indices are constructed by dividing the market capitalization of the Russell 2000 Index into Growth and Value indices, using style “factors” to make the assignment.
S&P 500 measures the performance of large capitalization U.S. stocks. The S&P 500 is a market-value-weighted index of 500 stocks. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
S&P 500 Growth and S&P 500 Value measure the performance of the growth and value styles of investing in large cap U.S. stocks. The indices are constructed by dividing the market capitalization of the S&P 500 Index into Growth and Value indices, using style “factors” to make the assignment. The indices are market-capitalization- weighted.
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