By David Scobie*
Witnessing the “red ink” generated by most asset classes in early 2022, it can be easy to forget how well investors have fared over longer periods.
Markets have certainly been challenged in recent years, most notably by the Covid-19 pandemic, but nonetheless have demonstrated considerable resilience, aided by government fiscal stimulus and solid profits from the world’s largest technology companies. Low interest rates also played their part, although we have seen this tailwind run out of puff, causing bond markets to deliver uncustomary weak returns in 2021.
The volatile nature of financial markets is 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 10 years. An interactive version of the Table can be found here.
A glance at the Table, with its scattered palette, quickly highlights how problematic it is to unearth patterns; or at least patterns that could be of use to us going forward. Last year’s stars sometimes prove to be a winner again the next year, but at other times sink to occupy the lower ranks. If only investing were easy!
Demystifying the Mosaic
Looking across 2021 and the past decade, a number of observations can be made from the Periodic Table:
14 of the 16 asset classes generated a positive return last year – bettering 2020 (12 positive returns) but not as remarkable as the 100% outcome achieved in 2019.
Leading the way in 2021, for the third time in the last four years, was Global Private Equity with a stellar return of 48.4%. Amid a busy year for merger and acquisition activity, and investors seeking out alternative sources of return, the asset class delivered handsomely for those with a means to access it and the ability to tolerate its higher risk and lower liquidity characteristics.
Global Listed Property featured in a creditable, but distant, second place in 2021 (+29.0%). The rebound for the asset class was welcome, having placed last in the table in the previous year as Covid-19 concerns weighed on investor sentiment in the retail and hotel sectors. Meanwhile its counterpart, Global Listed Infrastructure, finished closer to mid-table (+17.0%).
Developed Market Global Equities was another asset class that produced impressive returns in 2021, up between 24 and 28% depending on whether foreign currency was hedged or unhedged. The US market was a particular area of strength, supported by Europe. Meanwhile, in a notable divergence, Emerging Market Equities were far softer (+2.5%) with Turkey and China amongst the main culprits.
Countering a recent trend, New Zealand Equities fell well down the leader board last year. The sector sneaked into positive territory with a 0.2% return. Despite a resurgence from Sky TV and big gains from Skellerup, tumbles from the likes of A2 Milk and Meridian Energy ensured a sluggish year for our local market. More widely, the relatively defensive characteristics of NZX companies served as a partial handbrake.
Bringing an end to a 10-year run, Australian Equities (+16.2%) outperformed New Zealand Equities in 2021, and by a significant margin. “Value” type stocks came back into favour across the Tasman, particularly benefiting companies in the Communications and Financials sectors.
After a fraught decade, Commodities roared back to life in 2021 with a healthy 26.3% gain. Rising inflation provided a helpful backdrop for this asset class, as did supply chain disruptions. Energy was the strongest sub-sector, while precious metals were more muted.
Other positive contributions last year came from the relatively steady performers of NZ Direct Property (a healthy +19.0%) and Defensive Hedge Funds (a more subdued +4.3%).
New Zealand Fixed Interest (-6.2%) and Global Fixed Interest (-1.2%) took out the booby prizes in 2021. Meagre yields on bonds were offset by capital losses. Interest rates lifted as central banks around the world signalled that tighter monetary policy should be expected going forward. Such a return outcome for fixed interest would have come as a surprise to some investors - neither sector had previously finished in the bottom two spots over the past decade.
As so often proves to be the case, Cash was a relatively unattractive place to be in 2021, albeit superior to fixed interest. Safety-conscious investors with a bias to bank bills and term deposits would have seen their capital erode on a real (after inflation) basis.
Across the decade, the award for single highest annual return found a new recipient - Global Private Equity - thanks to its 2021 result. Meanwhile, the -22.8% return of Commodities in 2015 remained the lowest.
As a group, last year’s asset class returns spanned a top-to-bottom range of 55%. This was the widest of any year in the last decade, and compares to the period average of 33%.
Table takeaways
Diversified funds, including those offered via savings plans such as KiwiSaver, tend to have exposure to a collection of the asset classes contained in the Periodic Table. Looking at the past calendar year, such funds with a growth orientation, particularly focusing on offshore asset classes, generally performed better than others. Meanwhile, funds with a conservative and/or domestic orientation would have eked out more modest returns.
“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.” - Nassim Nicholas Taleb.
The Periodic Table, and indeed the above quote, remind us that investment markets are inherently volatile. We can never predict with a high degree of confidence what the future will hold over the short to medium-term. Therefore, for most individuals, the power of investing is harnessed through securing asset class diversification, taking on the risk you can tolerate and adopting a longer-term perspective.
While a rock band may be an unlikely source of investment inspiration, Guns N’ Roses essentially had it right – all we need is just a little patience.
*David Scobie is Head of Consulting NZ at global investment firm Mercer.
10 Comments
Market capitalization isn’t “wealth.” It’s the latest price, times shares outstanding. Blotches of ink on paper. Flashing pixels on a screen. If a dentist in Poughkeepsie buys a single share of Apple at a price that’s 10 cents higher than the previous trade, $1.6 billion in market capitalization emerges from thin air. If a single share trades 10 cents lower, $1.6 billion evaporates just as quickly. Whatever happens, every security in existence has to be held by someone until it is retired. Ultimately, the wealth inherent in a security is the future stream of cash flows it will deliver to its holder(s) over time. Price fluctuations don’t change those underlying cash flows. They just provide opportunities for the transfer of savings between investors. High valuations favor the sellers. Low valuations favor the buyers. Investors have never paid higher prices for those future cash flows, or accepted prospective returns so low.
Put simply, the bubble hasn’t changed the wealth, and a collapse won’t change the wealth. What will change is the market cap. I suspect that the erasure of market cap in the coming years, and possibly the coming quarters, may be brutal. Still, no forecasts are required, and our own attention will remain on observable valuations, market internals, and other factors. Meanwhile, even if an investor sells at these extremes, the only thing that will change is who holds the bag. Link
"Ultimately, the wealth inherent in a security is the future stream of cash flows it will deliver to its holder(s) over time. Price fluctuations don’t change those underlying cash flows. They just provide opportunities for the transfer of savings between investors".
Perfectly stated.
Is there a sense of 'light at the middle of the tunnel' here ?
Quote : 10 inflationary reactions
Market turmoil: "I expect that we'll see a return of the volatility that was prevalent for most of the month of January in the wake of this [CPI] report," said Brian Price, head of investment management at Commonwealth Financial Network. "Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year."
It's everywhere: "What started as pandemic-specific inflation has now broadened out across many, many categories both on the goods side of the economy and on the services side," explained Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "It reflects supply constraints both in the goods market and the labor market but it also is a function of still strong demand, particularly from U.S. consumers."
Consumer sentiment: "This survey is really showing that there's a lot of financial anxiety that's caused by inflation, market volatility and just that uncertainty coming out of the pandemic and the impact that it has had on everyone in their everyday lives," added Celeste Revelli, director of financial planning at eMoney.
Hard on the wallet: "A lot of people are hurting because of high inflation. The average U.S. household is spending an additional $276 a month - that's a big burden," estimated Ryan Sweet, a senior economist at Moody’s Analytics. "It really hammers home the point of 'what is the cost of inflation?'"
Wage-price spiral: "If consumers and workers start believing that inflation is not going to be transitory they're going to start demanding higher wages and higher inflation becomes embedded in the system," declared John Briggs, head of strategy for Americas at NatWest Markets.
Let it play out: "I certainly can relate to how people are feeling. I am somewhat optimistic though," announced Dr. Michael Greiner, economist at Oakland University. "While we're seeing a jump the amount of the jump is actually decreasing. Over the long-term this is really going to be a short term problem."
The White House: "According to Nobel laureates, 14 of them that contacted me, and a number of corporate leaders, it ought to be able to start to taper off as we go through this year," President Biden said in an interview. "In the meantime, I'm going to do everything in my power to deal with the big points that are impacting most people in their homes."
Supply chain: "While we're hopeful prices will begin to decline in the coming months, prices at grocery stores and restaurants may take longer to adjust downward," noted Jonathan Silver, CEO of Affinity Solutions, which tracks consumer purchasing habits. "We're unlikely to see a full correction in the supply chain until later this year or even 2023."
Policy error: "The first error occurred on Nov. 30, when the Fed finally retired 'transitory,'" pointed out Mohamed El-Erian, chief economic adviser at Allianz. "Now, the policy error would be to slam on the brakes because they didn't take their foot off the accelerator early enough."
Forex watch: "If the Fed is to step hard on the monetary brakes, we would certainly favor the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp," said Chris Turner, global head of markets at ING.
Unquote:
I think he's getting too many phone calls enquiring about their Kiwisavers sinking.
If we think of it from the counter party point of view (which is the broader market itself), it is good for market efficiency having Kiwisaver as one of its participants.
The liquidity provided to the market allows other participants to exit their position without causing disorderly unwinding.
In NZ's context, that liquidity is crucial on the NZX due to our small market size especially during times like these.
Long term view? The S&P500 has an annualised growth rate of 1.9% since 1870. If the S&P500 where on-trend it would currently be at the 1670 level but it is currently above trend at 4418, in fact it is about 4 standard deviations above historic trend.
If you really believe in historic trends and regression to trend then this is a colossal bubble. Another roaring '20s but even more frenzied.
Always interesting to look at these tables. I wonder where BTC as an asset class finished in 2021?
Ah... looks like the No.1 place again at +70% returns.
Yeah probably shouldn't add it to the table. People might start thinking it was worth putting a small % into.
Since it was also the No.1 performing asset class in 9 out of the past 11 years.
2021 +70%
2020 +302%
2019 +88%
2018 -72%
2017 +1325%
2016 +125%
2015 +33%
2014 -56%
2013 +5507%
2012 +186%
2011 +1473%
Yes, the two years it was not No1, it had large negative returns. But anyone starting to get see the bigger picture yet? Still worried about daily / weekly / monthly volatility?
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