Balanced investors back to the pinnacle, or close

Thought of the day

by Chief Investment Office 06 Feb 2019

Following the near 20% plunge in the final quarter of 2018, global equities are still around 5% below last year's peak, despite a vigorous rally at the start of 2019.

But it is notable that USD balanced portfolios, with full global and asset class diversification, are now at or near their high water mark. We see several reasons for this positive performance:

  • High quality bonds did their job. Even in periods of low government bond yields, high grade bonds typically perform well during equity market sell-offs. The final quarter of 2018 was no exception, with a near 4% return on the Bloomberg Barclays USD-denominated index of bonds rated Aa or higher, with a maturity of 5-7 years. That helped cushion part of the downside from the 16% fall in global stocks over the same period. And high grade bonds have continued to perform well in 2019, returning 1.1%.
  • Don't neglect emerging markets. USD-denominated sovereign bonds initially suffered during the October 2018 sell-off. But they recovered earlier than equities. From a low point in late November, the JP Morgan EMBI has returned 7.5%.
  • Avoid a home bias in stocks. Global diversification typically improves risk-adjusted rates of return. This has been especially true since the start of 2018 for Euro and Swiss-based investors. While the Euro Stoxx 50 index and Swiss SMI index have returned -5% and 1% respectively, US stocks have returned 4.6%. Equally, there have been prolonged periods when a home bias would have harmed US investors – including between 2002 and 2007 when the S&P 500 returned just 43% versus 129% for developed markets, excluding the US.So, we believe the market swings since October support our investment philosophy, based on a disciplined long-term approach with diversification within asset classes and also around the world. In addition, while high grade bonds look unattractive from a tactical perspective, including them in strategic allocations accelerates the speed at which portfolios recover from bouts of risk aversion. Since World War II it has taken an average of just 16 months for a 60/40 equity/bond portfolio to recover from a trough in the market back to a previous high, versus 26 months for an equity-only portfolio.

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