By Paul Kemmer
The discipline of adjusting a portfolio’s allocation between different asset classes in light of changing market conditions could have boosted investors’ returns significantly over the last 13 years, according to our calculations.
The chart below is a table we put together showing how the six major asset classes – equity, government bonds, credit, cash, property and hedge funds – each performed since the start of 2000.
We doubt anyone at the start of the millennium correctly predicted what actually went on to happen. For example, equity and hedge funds, which are often thought of as likely to generate the highest returns, signally failed to excel. Over the 13 years to the end of 2012, equity was the best-performing asset class only once. The same was true of hedge funds.
That strike rate is no better than government bonds, which topped the table in 2008. Property, on the other hand, came top six times, and credit twice.
It would be completely unrealistic to expect anyone to guess the top-performing asset class correctly every year. But investors might, we think, realistically aspire to allocate two-thirds of their portfolio, at the start of a year or other given period, to the asset classes that end up among that year’s top three performers.
If they had done so over the last 13 years, then according to our calculations they would have made an average of 8.2% a year, compared with the 5.7% a year they would have made by allocating equally between equity, government bonds, credit, property and hedge funds. That is an additional 2.5 percentage points a year.
Decisions on where to allocate a portfolio between different asset classes as market conditions and relative valuations change are, therefore, critical. Indeed, we regard them as the most important investment decisions an investor can take.
Source: P-Solve & Datastream