Picturing performance: A fresh perspective

As we’ve discussed on this blog in the past, the human brain isn’t always an investor’s best friend. It makes us expect the future to look a lot like the recent past.1 When put into investment terms, this often means that investors generally expect a period of strong market returns to be followed by more of the same; and they anticipate a period of disappointing returns to set the stage for similar performance yet to come. Obviously, that’s not always the case.

To help advisors contextualize recent performance and the relative riskiness of different asset classes for their clients, we have launched the Asset Class Dashboard, which contrasts current and historical returns for a sample of equity, real asset and fixed income asset classes (represented by relevant indexes) and will be updated monthly. Of course, past returns aren’t a predictor of future performance, but statistically speaking, we would expect 68% of all 12-month returns to fall within the “historical typical range” in the Dashboard.

Asset Class Dashboard: as of March 31, 2013
Illustrating performance

Large cap U.S. equity: Russell 1000 Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Dow Jones – UBS Commodity Total Return Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index. Rolling returns are useful for understanding the behavior of returns over multiple time periods as opposed to looking at a single end date. Rolling returns demonstrate patterns or longer term trends in the return data. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

What was normal relative to history in March 2013 – and what wasn’t?

When looking at the Dashboard with your client, we suggest you start by focusing your client’s attention on which of the most recent 12-month returns have been typical relative to history (i.e. for which asset classes does the orange marker fall into the blue range bar and/or the vertical dark blue line within the blue bar) and which ones haven’t. As of March 31, 2013, you can observe that:

  • the most recent 12-month return for all asset classes falls into the historical typical range. Cash is the one exception.
  • the most recent 12-month return for U.S. equities (whether large cap, small cap, defensive, dynamic), non-U.S. developed and global equities have been above their respective historical averages – but still fall within their respective historical typical ranges
  • commodities have been through a relatively difficult period in the past 12 months (-3% return for the period April 1, 2012 – March 31, 2013) – but they remain within the bounds of the historical typical range

What might this mean for investors?

U.S. equity markets2 experienced a strong run in the first three months of 2013 – leading some investors to wonder if these markets have risen too far, too fast. While it’s true that a nearly 11% return for the Russell 1000® Index in three months (as was the case from January 1, 2013 – March 31, 2013) is strong, the current Asset Class Dashboard shows that U.S. large cap equity returns for a longer, 12-month period don’t look so out of line with historical returns. While it’s impossible to predict what returns for the rest of 2013 (and beyond) will be, the March 31, 2013 Asset Class Dashboard reading for U.S. equities isn’t cause for alarm or undue excitement, in our view.

Cash3, with a return of 0.1% for the last 12 months ended March 31, 2013, is the one asset class that currently falls outside of its historical typical range. It is also an asset class that Russell believes is likely to be below its historical typical range for quite some time, unless the Federal Reserve reverses its monetary policy that is intentionally keeping interest rates low. In the words of Russell’s Chief Investment Strategist, Erik Ristuben, “holding cash right now exposes investors to ‘the silent killer’: inflation.”

Global high yield bonds4 have had a stellar run, returning 13.2% over the last 12 months – even exceeding the 12-month returns of global equities.5 In the current low interest rate environment, the search for yield in places outside the U.S. has benefited high yield investors. Investors should bear in mind, that, as the Asset Class Dashboard shows, high yield has historically had the broadest range of returns of the fixed income asset classes included in the Dashboard.

1 Tversky, A., Kahneman, D., 1974. Judgment under uncertainty: Heuristics and biases. Science 211, 453 – 458. And Cronqvist, Henrik and Siegel, Stephan, Why Do Individuals Exhibit Investment Biases? (October 12, 2012). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2012-01. Available at SSRN: http://ssrn.com/abstract=2009094 or http://dx.doi.org/10.2139/ssrn.2009094

2 Represented by Russell 1000® Index

3 Represented by Citigroup 3-Month U.S. Treasury Bill Index

4 Represented by Bank of American Merrill Lynch (BofAML) Global High Yield Index

5 Represented by Russell Developed Large Cap Index

Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets.

Russell 1000® Index: measures the performance of the large-cap segment of the U.S. equity universe.

Citigroup 3-Month U.S. Treasury Bill Index: This index measures monthly return equivalents of yield averages that are not market to market. It consists of the last one-month and three-month Treasury Bill issues, respectively. Returns for this index are calculated monthly only.

Bank of America Merrill Lynch (BofAML) Global High Yield Index: tracks the performance in US dollars on either a currency hedged or unhedged basis of Canadian Dollar, British sterling, US dollar and euro denominated developed market below investment grade corporate debt publicly issued in the major US or eurobond markets. Russell believes that the hedged version of the index is a more appropriate benchmark for the Fund.

Russell Developed Large Cap Index: offers investors access to the large-cap segment of the developed equity universe representing approximately 70% of the global equity market. This index includes the largest securities in the Russell Developed Index.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

RFS 10678

  1. June 6th, 2013 at 06:58 | #1

    very helpful info – i think it should help in giving clients a better understanding

  2. avatar
    Johann Schneider
    June 7th, 2013 at 11:35 | #2

    @john p smallwood Thanks for the feedback. We want to make it easy to talk about asset-class performance in simple terms. Be sure to check back for the monthly updates of the Asset Class Dashboard readings.

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