Mercer's David Scobie examines the 'confounding' strong investment returns made in the past year

By David Scobie*

To the average investor, 2020 was nothing short of confounding. Had one received magical insight at the start of the year that the world would become engulfed by a devastating pandemic, surely they would have reduced risk and missed out on some strong returns from equity assets. Aided by exceptionally low interest rates, government fiscal injections and rapid-fire vaccine development, most share markets were able to recover from a first quarter collapse to end the year well in the black. Indeed, who would have thought!

However, not all asset classes delivered the goods, as highlighted by Mercer’s ‘Periodic Table’ of investment returns. Produced annually, the Table colour-codes 16 major asset classes and ranks how each performed, on an annual basis, over the last ten years. An interactive version of the Table can be found here.

A quick glance at the Table shows how one year’s winners can quickly become next year’s losers, and vice versa. Predicting what may happen next poses a big challenge to even the most avid market followers.

Key Observations

Looking across 2020 and the past decade, a number of observations can be made from the Table:

• 12 of the 16 asset classes generated a positive return last year – a healthy proportion albeit beneath the 100% level achieved in 2019. 

• Leading the way in 2020 was Global Private Equity (+14.9%) – an asset class not accessed by many investors but consistently a source of double-digit returns over the past decade, partly reflecting its higher risk and lower liquidity characteristics. 

• Also high on the leader board last year was New Zealand Equities (+14.6%). As was the case for all share markets, February and March proved highly challenging as the reality of the spread of COVID-19 kicked in. However, the presence of Fisher and Paykel Healthcare and a range of utilities in the large cap space saw the NZX recover well by year-end. 

• Our Australian cousins fared not quite so well in 2020, notwithstanding an incredible resurgence from deferred-payment company Afterpay, as a range of travel and energy-related stocks struggled. Notably, in a Trans-Tasman slam-dunk, the NZX has now outperformed the ASX for ten years running. 

• Further afield, global share markets generally delivered pleasing outcomes in 2020, including Developed Market, Emerging Market and Small Cap Equities. However, certain segments were an exception. Global Listed Property (-13.6%) and Global Listed Infrastructure & Utilities (-6.5%) feature at the bottom of the Table. The pandemic proved particularly troublesome for the profitability of businesses in the hotel and retail sectors.  

• New Zealand and Global Fixed Interest (with the exception of Emerging Markets) delivered solid returns of +5.4% last year alongside a general fall in interest rates.  Meagre yields on bonds were enhanced by capital gains. While it couldn’t compete with the riskier asset classes, fixed interest exposure gave a helpful boost for conservative investors. 

• An aversion to risk was often prevalent during the year, but overall Cash proved an unattractive place to be as central banks pressured interest rates lower. The asset class generated a historically low return of +0.6% - a safe haven but not a path to riches!

• Mid-table returns in 2020 were generated by the mid-risk asset classes of NZ Direct Property and Defensive Hedge Funds. Meanwhile, a frequent laggard in the Periodic Table, Commodities, again could not catch a trick (-5.6%). A very weak first quarter was not sufficiently offset by a hearty rally over the remainder of the year as investors began to contemplate whether higher inflation lay ahead. 

• Across the decade, the award for single highest annual return remains with Emerging Market Equities (+34.6% in 2017). However, the sector also had the second-to-lowest annual return, being -18.3% back in 2011 – in itself a clear illustration of how volatile individual asset classes can be. 

• As a group, last year’s asset class returns comprised a top-to-bottom range of 29% – similar to the prior three years and to the average for the decade as a whole (32%). 

Takeaways for Investors

For investors in diversified funds including KiwiSaver, a relatively narrow portfolio emphasising Shares and Bonds, with something of a domestic bias, proved hard to beat in 2020. However, it is too easy to conclude that simple is superior. With few asset classes standing out as obviously ‘cheap’ at present, the argument for wider diversification is perhaps as strong as ever. Exposure to non-traditional asset classes can serve to balance out the path of returns over time, so long as the risks are understood and access is attained on a cost-effective basis. 

In sum, one can while away the hours making additional observations on the Periodic Table, and perhaps identify patterns. But are they real or illusory? The unpredictable nature of capital markets is unavoidable. The Table serves as a reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term. In that way, there is a greater chance that periods of market disruption such as we saw in 2020 can be tolerated, rather than spark a panic reaction. 

With a well-constructed portfolio in place, for all but the most skilled investors, the best advice during episodes of heightened volatility is often: Don’t just do something, stand there!

*David Scobie is Head of Consulting (NZ) at Mercer Investments, a global wealth advisory and investment solutions business.

This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.