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Asset Class Returns – An Historical Review

Asset Class Returns – An Historical Review

2018 has been a tough year for investors. It has also been a unique year, as investors in nearly every asset class have seen negative returns to date. In most years, a diversified investor can look across his or her portfolio and see a combination of negative and positive returns from a mix of asset classes. One would even find the majority of asset classes have positive returns in a typical year. 2018 has been much different. To show how different it has been, we gathered some historical index data from the eight asset classes below going back to 1980.

  • US Large Stocks
  • US Small Stocks
  • International Large Stocks
  • International Small Stocks
  • Short-Term Bonds
  • Long-Term Bonds
  • Real Estate
  • Commodities

We can also include these four additional asset classes, which don’t have as long of a data set, to observe a total of 12 different asset classes going back to 1998.So far in 2018, only the Short-Term Bond asset class has shown a positive return. Tracking an index of high-quality, short-term bonds would have given you a return of just over 1%, while the remaining asset classes have been down. This only happened one other time in the last 38 years. As you might have guessed, that year was 2008 and all eight of these asset classes had negative returns. There was only one other time in which more than half of these asset classes posted a negative yearly return. Over half of the asset classes had positive returns in 30 of the 38 years, and it was most common for all eight to have a positive return. This happened in 12 of the years.

  • High Yield Bonds
  • Emerging Market Stocks
  • Hedging Strategies
  • Inflation-Indexed Bonds

The story is very similar when you add these four asset classes. 11 of the 12 are down this year, and 2008 is still the only year in which all of them had a negative return. There was only one other year in which the majority of these asset classes were down, while we saw positive returns from all 12 in seven of the 20 years.

This past year may have been frustrating for most investors, though looking back in history shows us that 2018 is an outlier. There is even a bright spot in all of this – years like 2018 are typically followed by a much better year. Looking at the eight asset classes we tracked from 1980 through 2017, we find that there were eight years in which at least half of the asset classes had negative returns. Six of those years were followed by a year with at least seven asset classes showing positive returns. This is not to say we can predict what will happen in 2019, though history has showed us that markets are resilient, and things tend to turn around after periods like 2018. The long-term investor with a thoughtful financial plan and a diversified portfolio has historically been rewarded after remaining patient during times like these.

Additional Important Disclosure Information

Definitions of Indices

The indexes or proxies used for each asset class are as follows.  Where index data or a proxy did not exist, that asset class was not part of the portfolio mix until data was available.

Asset Class: Global Short-Term Bonds

Primary Index:   Bloomberg BarCap Corporate A+ 1-3 Years Total Return Index (Inception: 1/1/2003)

This U.S. Corporate Index covers USD-denominated, investment-grade, fixed-rate, taxable securities sold by industrial, utility and financial issuers and whose maturity period is at least one year but not more than three years. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. It excludes bonds with equity-type features (e.g., warrants, convertibility to equity), private placements, floating rate issues and structured notes with embedded swaps.

Secondary Index: Merrill Lynch 1-Year Treasury Index (Inception: 1/1/1967)

The Merrill Lynch 1-Year US Treasury Note Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury note that matures closest to, but not beyond, one year from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date. You cannot invest directly in an index.

Asset Class: Global Long Term Bonds

Primary Index: Bloomberg BarCap Long US Corporate Index (Inception: 2/1/1990)

This U.S. Corporate Index covers USD-denominated, investment-grade, fixed-rate, taxable securities sold by industrial, utility and financial issuers and whose maturity period is at least ten years. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. It excludes bonds with equity-type features (e.g., warrants, convertibility to equity), private placements, floating rate issues and structured notes with embedded swaps.

Secondary Index: IA SBBI US Long Term Corporate (Inception: 1/1/1967)

Corporate Bond Total Returns are represented by the Citigroup Long-Term High-Grade Corporate Bond Index. The Index includes nearly all Aaa- and Aa-rated bonds with at least 10 years to maturity. If a bond is downgraded during a particular month, its return is included in the Index for that month before removing it from future portfolios.

Asset Class:  Opportunistic Bonds: (Prior to 1/1/1994 allocations to Opportunistic Bonds were added to Global Short Term Bonds)

Primary Index: Credit Suisse/Tremont Hedge Fund Index Fixed Income Arbitrage (Inception: 1/1/1994)

The CS/Tremont Fixed Income Arbitrage index is an asset-weighted hedge fund index derived from the TASS database of more than 5,000 funds. The fixed income arbitrageur aims to profit from price anomalies between related interest rate securities. Most managers trade globally with a goal of generating steady returns with low volatility. This category includes interest rate swap arbitrage, US and non-US government bond arbitrage, forward yield curve arbitrage, and mortgage backed securities arbitrage. The mortgage backed market is primarily US based, over the counter, and particularly complex.

Asset Class: Inflation Indexed Bonds

Primary Index: Bloomberg BarCap US TIPS index (Inception: 7/1/2000)

The index includes all publicly issued US treasury inflation protected securities that have at least 1 year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value. In addition, the securities must be denominated in US dollars, must be fixed rate and non-convertible and should have maturity period of no less than 10 years. The index is market capitalization weighted and the securities in the index are updated on the last calendar day of each month.

Secondary Index: Citi US Inflation Linked Securities Index (Inception: 4/1/1997)

The Citigroup U.S. Inflation-Linked Securities Index measures the return of bonds with fixed-rate coupon payments that adjust for inflation as measured by the Consumer Price Index (CPI). All issues have maturity of at least 5 years but less than 10 years.

Asset Class: US Large Cap

Primary Index: S&P 500 Index (Inception: 1/1/1967)

The S&P 500 is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Each constituent in an index is weighted by its market-capitalization, as determined by multiplying its price by the number of shares outstanding after float adjustment. The price return of an index is a measure of the cap-weighted price movement of each constituent within the index.

Asset Class: US Small Cap

Primary Index: Russell 2000 Index (Inception: 1/1/2000)

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The inception date of the Russell 2000® Index is January 1, 1984.

Secondary Index: IA SBBI US Small Stock (Inception: 1/1/1967)

Currently, the Small Company Stock return series is the total return achieved by the Dimensional Fund Advisors (DFA) Small Company 9/10 (for ninth and tenth deciles) Fund. The Fund invests in a broadly diversified cross section of small companies. DFA’s portfolio construction includes stock selection that is based on market capitalization and eligibility criteria.  DFA’s proprietary database includes more than 9,000 securities. Data is analyzed from a variety of sources that include industry publications, research reports as well as a number of electronic data services. The U.S. 9-10 Small Company Strategy target universe includes those companies that have a market capitalization in the lowest 4 percent of the market universe. The market universe is defined as the aggregate of the NYSE, AMEX and NASDAQ NMS firms.

Asset Class: International Small Cap

Primary Index: MSCI EAFE Small Cap Index (Inception: 1/1/1993)

The MSCI EAFE Small Cap Index Fund targets 40% of the eligible small cap universe in each industry group of each country represented by the MSCI EAFE Index. MSCI defines the small cap universe as all listed securities that have a market capitalization in the range of $200 – $1500 million USD. In addition to this capitalization range, MSCI uses a specialized framework of foreign inclusion factors to adjust the market capitalization of securities for free float available to foreign investors.

Asset Class: International Small Cap

Secondary Index: DFA International Small Cap Fund (Inception: 1/1/1970)                           

The International Small Company Portfolio is a no-load mutual fund designed to achieve long-term capital appreciation. The Portfolio pursues its objective by investing in the small companies of Canada (0-15%), Europe (25-50%), Japan (15-40%), Pacific Rim (0-25%), and the United Kingdom (15-35%). The Portfolio currently invests in companies in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Proxy Index: IA SBBI US Small Stock (Inception: 1/1/1967)

Currently, the Small Company Stock return series is the total return achieved by the Dimensional Fund Advisors (DFA) Small Company 9/10 (for ninth and tenth deciles) Fund. The Fund invests in a broadly diversified cross section of small companies. DFA’s portfolio construction includes stock selection that is based on market capitalization and eligibility criteria.  DFA’s proprietary database includes more than 9,000 securities. Data is analyzed from a variety of sources that include industry publications, research reports as well as a number of electronic data services. The U.S. 9-10 Small Company Strategy target universe includes those companies that have a market capitalization in the lowest 4 percent of the market universe. The market universe is defined as the aggregate of the NYSE, AMEX and NASDAQ NMS firms.

Asset Class: Emerging Markets  (Prior to 1/1/1970 allocations to Emerging Markets were added to International Small-Cap)

Primary Index: MSCI Emerging Markets Index (Inception: 1/1/1988)

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets and which aims to capture 85% of the (publically available) total market capitalization .

Secondary Index: DFA Emerging Markets (Inception: 1/1/1970)

The Emerging Markets Portfolio is a no-load mutual fund designed to achieve long-term capital appreciation. The Portfolio pursues its objective by investing in emerging markets equity securities that Dimensional deems to be large company stocks at the time of purchase. Dimensional will consider, among other things, information disseminated by the International Finance Corporation in determining and approving countries that have emerging markets. The Portfolio currently invests in companies in Brazil, Chile, China, the Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey. Due to repatriation restrictions, the Portfolio currently holds but does not purchase securities in Argentina.

Asset Class: High Yield Bonds

Primary Index: BarCap US Corporate High Yield Index (Inception: 8/1/1983)

The Barclays Capital High Yield Very Liquid Index includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year, regardless of optionality, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P, and Fitch, respectively (before July 1, 2005, the lower of Moody’s and S&P was used), and have $600 million or more of outstanding face value. Only the largest issue of each issuer with a maximum age of three years can be included in the Index. Original issue zero coupon bonds, step-up coupons, and coupons that change according to a predetermined schedule are also included. The High Yield Index includes only corporate sectors. The corporate sectors are Industrial, Utility, and Financial Institutions. Excluded from the High Yield Index are non-corporate bonds, structured notes with embedded swaps or other special features, private placements, bonds with equity-type features (e.g., warrants, convertibility), floating-rate issues, Eurobonds, defaulted bonds, payment in kind (PIK) securities and emerging market bonds. The High Yield Index is issuer capped and the securities in the Index are updated on the last business day of each month.

Asset Class: Real Estate (Prior to 1/1/1972 allocations to Real Estate were added to Global Large Cap Stocks)

Primary Index: FTSE NAREIT All REITs Index (Inception: 1/1/1972)

FTSE NAREIT All REITs Index represents the full universe of publically traded REITs, including those companies that do not meet minimum size rule, liquidity criteria or free float adjustments. Stocks are free-float weighted to ensure that only the investable opportunity set is included within the index.

Asset Class: Commodities (Prior to 1/1/1980 Allocations to Commodities were added to Global Large Cap Stocks)

Primary Index: Dow Jones UBS commodity Index (Inception: 1/1/1991)

The Dow Jones-UBS Commodity IndexSM (DJ-UBSCISM) is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities. The index is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweighting of the components).

Secondary Index: S&P Goldman Sachs Commodity Index: 1/1/1980)

The widely tracked S&P GSCI is recognized as a leading measure of general price movements and inflation in the world economy. The index representing market beta is world-production weighted. It is designed to be investable by including the most liquid commodity futures, and provides diversification with low correlations to other asset classes.

Asset Class: Hedging Strategies  (Prior to 6/1/1998 allocations to Hedging Strategies were added to Global Large Cap Stocks)

Primary Index: Morningstar Hedge Fund of Funds (Inception: 1/1/2003)

These funds offer investors exposure to several different hedge fund investment tactics. In most of these cases, the fund-of-funds manager selects outside hedge funds as part of a multi-manager portfolio allocation process. Each external hedge fund selected by the fund-of-fund manager may focus on a different strategy. An investor’s exposure to different tactics may change slightly over time in response to market movements.

Secondary Index: MSCI Long Short Credit (Inception: 6/1/1998)

The Long Short Credit Index is made up of funds in our database that meet the MSCI Long-Short classification. These Long-Short Credit funds take exposure to credit-sensitive securities, long and short. Trades are based around credit analysis of the issuer and security, and may incorporate credit market views, and may be based either on anticipated price movement or positive carry. The manager assumes credit risk either long or short as a core part of the investment strategy, but interest rate risk is not a significant exposure, being either explicitly hedged or simply far less significant than credit risk.

Asset Class: Infrastructure  (Prior to 2/1/1996 allocations to Infrastructure were added to Global Large Cap Stocks)

Primary Index: Alerian MLP index (Inception: 2/1/1996)

The Alerian MLP Index (“Index”) is a market-cap weighted, float-adjusted index created to provide a comprehensive benchmark for investors to track the performance of the energy MLP sector.  It is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. The Index components are selected by Alerian Capital Management, LLC. Alerian is a registered investment advisor that exclusively manages portfolios focused on midstream energy MLPs. The index is disseminated by the New York Stock Exchange real-time on a price return basis (NYSE: AMZ).

Information included in this article has been gathered from various sources which are believed to be reliable; however RegentAtlantic cannot guarantee the accuracy of this information.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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