One other point worth noting: GMO's 7
year asset class return forecasts as of 10/31/11: -2.3 % for International Bonds, -1 % for US Bonds, -.8 % for cash, -.4 % for US Small Cap, 1.8 % for US Large, 5.6 % for Emerging market equities, and 5.8 % for International Large Caps.
Earlier this week we linked to a piece by Chris Brightman and Jim Masturzo at Research Affiliates that both looks back a 100 years at capital market performance and tries to project forward 10 -
year asset class returns.
Not exact matches
It's no secret that the venture capital industry, as an
asset class, has seen spectacularly mediocre
returns over the last 10
years or so.
Private firms like Amur have proliferated in the past few
years, which is hardly a surprise, given that Canada's stubbornly low interest rates have pushed investors into alternative
asset classes, and residential real estate has generated stunning
returns for investors and homeowners alike.
Yields on the securities have climbed to their highest levels in six
years, and total
returns were negative 2.6 percent for the first two months of 2018, making for the worst start of a
year for the
asset class since 1981.
Fixed - income investors should be realistic in expecting this to be a
year of relatively low
returns across
asset classes in general — a
year in which small ball becomes much more important than swinging for the fences.
In recent
years they have added international equities and small - cap stocks —
asset classes that come with higher volatility than sturdier blue chips, but also offer the promise of higher
returns.
The point is that diversification among
asset classes really helped ameliorate the
return an equity - only investor would have suffered this
year: a loss of 2.7 % is better than a loss of greater than 10 %.
I didn't make a lot of money, but I did get at least a small positive
return from each of the
asset classes I own, including equities, which is something given the TSX fell 11.07 % last
year.
«Stocks certainly look more attractive than bonds, but the case for stocks versus other
asset classes is less clear... «So while
returns may compress from the outsized gains we have seen over the last several
years, we remain constructive on equities.
Those
returns were incredibly volatile — a stock might be down 30 % one
year and up 50 % the next — but the power of owning a well - diversified portfolio of incredible businesses that churn out real profit, firms such as Coca - Cola, Walt Disney, Procter & Gamble, and Johnson & Johnson, has rewarded owners far more lucratively than bonds, real estate, cash equivalents, certificates of deposit and money markets, gold and gold coins, silver, art, or most other
asset classes.
Every
year, a quantitative group within Franklin Templeton Multi-
Asset Solutions reviews the data and themes driving capital markets in order to build
asset return expectations for different
asset classes for the next five to 10
years.
Based on our research, none of these
asset classes are likely to produce the same type of double - digit
returns that investors have enjoyed in recent
years.
We see muted
returns across
asset classes in the coming five
years, as structural dynamics such as aging populations help keep us in a low -
return world, and we believe investors need to go beyond broad equity and bond exposures to diversify portfolios in today's market environment.
Total
returns were muted for most fixed income
asset classes thus far this
year.
We believe the venture
asset class will produce outsized
returns over the next 5 - 10
years.
Gold Mining Stocks, the highest performing
asset class last
year returning 48 %, are now underperforming.
«Recent
returns over the last several
years have outpaced underlying fundamentals across nearly all
asset classes»
Major
Asset Classes with Positive Total
Returns US Reits — 2.62 % US Large Caps (SP500)-- 2.2 % Munis (3 yr)-- 1.16 % Emerging Market Bonds — 1.08 % US Bonds — 0.76 % Cash — 0.02 % Unfortunately, 2015 was not a great
year for diversified portfolios.
As I noted in an earlier post (See
Asset Class Returns for 2009), Canadian REITs were red - hot last
year, posting a total
return of 55.3 %.
Reflecting on this financial
year just past, it may be helpful to look at the
returns of the major
asset classes over this
year and then for the last 20.
I believe it's fair to say that as we look at a world where very few
asset classes globally have produced positive nominal
returns year - to - date, and a world where US corporate earnings and economic growth have been tepid at best, increasingly ascending US equity valuations connote incremental capital concentration.
Does fourth quarter global economic data set the stage for
asset class returns the next
year?
Sure, there will be
years here and there when the
return on equities is negative, but over the long run, equities have dominated other
asset classes and we see no reason for that to change.
Using monthly
returns for the
asset class proxies during January 1995 through October 2015 and longer samples to estimate ten -
year returns and
return correlations, they find that: Keep Reading
They measure long - term risk as the probability that portfolio value is below its initial value after ten
years from 10,000 Monte ‐ Carlo simulations based on expected
asset class returns, pairwise
asset return correlations, inflation, investment alpha (baseline constant 1 % annually) and withdrawals (baseline approximately 5 % annual real rate).
For an illiquid
asset class such as art, many individual
assets do not trade within commonly used
return measurement intervals (such as a
year).
+ Rebalancing annually into the best performing
asset class in the prior
year, I come up with an annualized
return from 2007 - 2015 of -3.14 %.
In their February 2015 paper entitled «The End - of - the -
year Effect: Global Economic Growth and Expected
Returns Around the World», Stig Møller and Jesper Rangvid examine relationships between level of global economic growth and future asset class returns, focusing on growth at the end of th
Returns Around the World», Stig Møller and Jesper Rangvid examine relationships between level of global economic growth and future
asset class returns, focusing on growth at the end of th
returns, focusing on growth at the end of the
year.
«RA takes a look back at the last ten
years and calculates the annualized
return of a classic 60 % equity / 40 % fixed income portfolio versus 16 pure
asset classes on their own.
Investing only in the top - performing
asset class each
year would likely generate the best
returns, however, such a feat is extremely difficult, if not impossible, to do consistently, even for seasoned investors.
On average, the 15 -
year compound
returns were 14.8 % for international small - cap blend stocks, versus 11.8 % for the S&P, and 13.6 % for a combination of these two
asset classes, with annual rebalancing.
But as John Hussman said in his October 17th Weekly Market Comment, «passive
returns look glorious in the rear - view mirror precisely because Fed - induced yield - seeking speculation has driven nearly every
asset class to rich or obscene valuations in recent
years.»
The hope is that
returns will revert to the mean and the under - performing
asset classes will out - perform in the subsequent
year, as Mebane Faber lays out in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.
Here's the
return of various
asset classes and how the average investor has fared over the last 20
years (source):
The resemblance to the poster that hung in your high - school chemistry
class is only superficial: this table simply presents the
returns of various
asset classes ordered from highest to lowest over a period of several
years.
The theory tells us how to adjust our allocations among a diverse set of
asset classes to get the best combination of risk (as measured by the
year - to -
year volatility) and
return.
One simple computation reflects the impact of the average 40
year return for the 4
asset classes individually, as well as rebalancing.
Based on the average 40 -
year return of each
asset class, there is a 15 % higher
return without rebalancing.
As the S&P; was compounding at 28.5 % a
year (1995 - 99), our firm was rebalancing the excess
returns to small cap, value, and international
asset classes.
Both of these
asset classes also struggled for the 15
years ending 1974, with almost the same
returns as the last 15
years.
Sure enough, during this 42 -
year period, annualized
returns for all three
asset class returns were within our expected range: 9.1 %, 10.6 %, and 8.9 %, respectively.
This is largely because the last 15
years have seen strong
returns in several
asset classes that are absent in the Global Couch Potato: real -
return bonds (9 % annualized since 1998), Canadian REITs (13 % since 1998), emerging markets (8.8 % since 1999).
In October 2015, GMO estimated that EM stocks (4.0 % real
return) would be the highest
returning asset class over the next 5 - 7
years, EM bonds (2.2 %) would be second.
The resulting rates of
return aren't from taking averages, it's from allocating equal amounts from the different
asset classes into one portfolio, then rebalancing it on a regular basis, usually once or twice a
year.
We now see lower potential
returns ahead for many
asset classes over the next five
years, given moderate economic growth and stretched valuations.
The bars in the chart below show our annual
return assumptions for selected
asset classes over the next five
years, while the dots show our expectations of volatility.
In about 70 % of the
years since 1926, the
return on stocks as an
asset class has been positive, sometimes very positive.
We see muted
returns across
asset classes in the coming five
years, as structural dynamics such as aging populations help keep us in a low -
return world, and we believe investors need to go beyond broad equity and bond exposures to diversify portfolios in today's market environment.
Mr. Arnott's firm Research Affiliates maintains an
Asset Allocation site that provides 10 - year Expected Returns across various securities and asset cla
Asset Allocation site that provides 10 -
year Expected
Returns across various securities and
asset cla
asset classes.