Asset allocation quilt – the winners and losers of the last 10 years - Monevator (2024)

Fascinating stuff and I expect I’ll return to it nervously, every time I have some funds that need investing.

I’ll echo the earlier poster in hoping this becomes a January feature – appreciate the work involved.

Nice to see a British version,
That one is interesting as well https://www.bankeronwheels.com/the-long-game-historical-market-returns-2022-expectations/

Mogul

@ David C – You’re right, geographic market-cap trackers are aligned with stock market capitalisations rather than economic punch. The US and UK are both over-represented by stock market capitalisation. It’s impossible to align with the real economy but there are some interesting articles out there on how you might go about it.

@ Attilio – It’s iShares MSCI ACWI UCITS ETF (Acc)

@ Al Cam – cheers! And you’re spot on about 8 out of 10 years. In my defence, I was going colour blind by the time I finished the table 😉

@ James and Jim Jim – thank you for the links. + Chiny – Yes, think this will be an annual feature. I’ve done the hard work now getting the first 10 years worth of data.

@MrOptimistic — At least you recognise it rather than obfuscating, or prophecizing an 80% crash to make things ‘right’.

That’s a credit to you. 🙂

Mogul

Interesting that the domestic focused FTSE250 has done so well over ten years.

Beating everything outside of the US despite some large economic shocks.

@ new investor – just had to draw a line somewhere 🙂

@ Ka – global reits

I have seen equal weight funds like RSP which stacks up well against SPY (as per https://einvestingforbeginners.com/equal-weight-sp-500-etf-ansh/) but RSP is equal weight companies, which still has a skew of a larger % in technology;
Information Technology 15.04
Industrials 14.45
Financials 13.33
Health Care 13.12
Consumer Discretionary 11.04
Consumer Staples 6.89
Real Estate 6.21
Utilities 5.63
Materials 5.47
Communication Services 4.53
Energy 4.29

Using the quilt numbers, it would be interesting to see the results of an equal weight sub-asset portfolio, rebalanced equally at the end of each year.

@D — Well you have to eat returns in your currency of choice (or a mix). I know investors who measure their returns blended over a basket of currencies because they live a very peripatetic lifestyle for example. A scant handful try to track returns in special drawing rights. But 90% of Monevator readers are UK based and GBP returns are what matter, and most of the rest are US based, where their own USD quilts abound (one reason we did a UK version).

Local returns in local currencies are interesting academically but they are not much practical help to an investor I’d submit. Even if you think they may tell you something about the future performance, remember these things are correlated with equities. For example currency weakness may boost local share prices in a local currency because it does a lot of exporting and listed exporters become more competitive. That doesn’t mean it’s a bad idea to invest, but you could for example pile in, then see the currency strengthen on economic growth (good when translated back in to GBP) but that in turn then de-rates your local investments because the exporter becomes less competitive again!

Of course this sort of thing happens over the long term (and inflation looms large in the maths/impacts, too, with currency appreciation/depreciation) not over a year or two.

@Trevor — Equal weighted funds usually outperform because they have more small cap exposure I believe.

@Hari — I thought *exactly* the same thing, but decided not to burden @TA with my active speculations…

[Edit: Note, especially to @D who has unfortunately subscribed to comments — my first reply was wrong, I banged out the wrong outcome of the currency/competitiveness roundabout! Have tried to expand more clearly/correctly.]

Great article.

I’d also recommend looking at the US angle that came out quite recently.

https://awealthofcommonsense.com/2023/01/updating-my-favorite-performance-chart-for-2022/

Some observations from my perspective

– REITS are not a great diversifier at all. Worth owning as part of your overall allocation to risk assets, for most people through an index tracker. But I struggle to see any benefit in a oversized holding. In times of stress they seem to behave like super volatile equities. Same happened in 2008. Note very different to owning real estate physically, which comes with its unique set of opportunities and challenges

– Inflation hedge. Well there isn’t a practical one is there from this set? There are asset classes that seem to do better than others – cash, commodities, gold but their long term holding costs versus other risk assets means your essentially paying expensive insurance. Commodities is the worst of the lot.

– Interest vs inflation. The trouble is for many asset classes except those with zero duration in times of inflation the negative impact of interest rate rises to counter inflation swamps any inflationary benefits of assets (e.g INLG, $TIPS, to a lesser extent reits per above).

– Equities are not a good inflation hedge. period. They are also the best chance most people have of beating inflation long term. period.

– 10 years is not long term. S&P 500 could be bottom of the pack quite easily in next 10 years given elevated CAPE etc

– Bonds really should do better this year. But a negative real return for global inflation linked bonds over ten years is not great at all given why most people invest in this class

There’s a lot to be said for investing in a global tracker with cash for liquidity and doing something else with your time!

Assuming the global equities ETF includes the US, which would skew it significantly, the quilt shows how much the US tech bubble has affected the last decade. It’s deflated a bit as a result if interest rate rises, but there’s still a lot of air in the bubble.

I’ve no idea what will win in the next decade but bonds look a lot more attractive now than a year or two ago.

Just reinforces my belief that the best thing to do is buy the global equity tracker, then adjust risk by holding FSCS protected cash deposits at the best rates available (or gilts to maturity).

– Simple
-You will never find yourself at the bottom of the chart
– Helps to protect you against FOMO
and you own misguided belief that you can predict what is going to outperform

Mogul

Ha, yes, I expect hedge funds around the globe are loading up on European equities as we speak.

I’d like to put corporate bonds in the table I think, and multi-factor equities, but I’m running out of colours!

@ Mr jetlag – nice idea about the key. I suppose the 10-yr returns fulfil that function but they’re on the wrong side.

@ Seeking Fire – I broadly agree – there isn’t a worthwhile inflation hedge if you’re an accumulator – assuming inflation is brought under control relatively quickly. As a decumulating retiree the ‘insurance’ premium may well be worth paying to avoid getting ravaged by 1970s scale inflation. The perfect instrument is index-linked certificates – which of course we can’t get anymore – though lucky US readers can still buy I bonds. Failing that it still seems worth looking into ladders of individual index-linked gilts – depending on the price you’d have to pay.

Re: commercial property – I wonder what we’d say if it had just had a great decade rather than a dismal one. When I eyeball property against global equities across the table – it’s definitely doing something a little different. Only once in the decade did that work out well however – 2014 – when property returns were double global equities. The same thing happened in 2012 too – the year that’s just dropped off the quilt.

There’s no inherent reason for property to be so poor – except IIRC valuations were extremely high within a couple of years of the Credit Crunch. And the pandemic hasn’t helped.

I think you’re spot on about property being no diversifier at all in a serious bear market. The two asset classes are highly correlated and there are academic papers out there that show property and equities fall like rope climbers tied together during a crisis.

I still have some hopes for property though as an equity diversifier rather than a portfolio diversifier and perhaps it’ll mean revert after recent pummellings.

@xxd09 – yes, the Callan chart is the first ‘quilt’ I remember seeing. I think they called it the periodic table of investing, which I loved.

Interesting (if naughty) to compare annualised returns for some active funds over the same timescale.

From Trustnet data, the two UK biggies: Fundsmith Equity 15.9%, and Scottish Mortgage investment Trust 17%.

Mogul

Very naughty. Bad Chesterdog 😉

A great comparison would be if we picked 10 different active funds someone tipped a decade ago and made a quilt from their fortunes – for better or worse.

There is a piece by Greybeard somewhere on the site that includes a list of investment trusts he liked the look of many moons ago.

I looked up some of them last year to see how they’d done since. They were all over the shop. Some big winners in his list but some big losers too.

@Chesterdog @TA — My mum set up an investment trust portfolio with two equal sized subscriptions in 2012 and 2013, which was invested with my guidance into various UK equity income trusts. The idea was to create something with a modest portion of her wealth that might do better at providing an income versus inflation than keeping it all in cash, over the longer-term. As things turned out though, the dividends were just reinvested. I directed a bit of modest trading over the years (maybe 10 swaps from one trust to another over the decade).

Messing around with our calculator suggests a rough and ready CAGR of 8%, which I think is much more representative than picking two of the best performing UK funds of the past decade (for a while it wasn’t even close with SMT, but it’s since retrenched markedly).

Some money was taken out to pay for things blowing up (a car or a boiler or something) a few months ago and it isn’t unitized, so it’ll be harder to stab at the CAGR from here.

Needless to say she would have done much better in a global tracker in hindsight (about a 14% CAGR) but as I say she thought she wanted some sort of income at the start. 🙂

It’s been an educational little portfolio for me I must admit. And lately like most UK stocks its been hugely outperforming global equities, so maybe the reversion is on! 😉

Nice work, it’s very interesting to see this broken down in GBP.

If anything, the poor run of commodities during most of the decade should have made them *more* interesting… unless one was working from the active prediction that disinflation will last forever.
Volatility really isn’t a problem either as long as it is uncorrelated with the rest of the portfolio. Aggregate commodities have a low correlation with the stock market.

The problem with commodities is how to invest in practice. Commodity ETFs are a funny business, they depend a lot on the shape of the futures curve and can deliver much lower returns than the index they are supposed to track. I found this all too complicated and settled on a chunk of commodity stocks instead. Using a mix of energy, mining and agriculture sector ETFs. It’s less than ideal and comes with a higher correlation with the overall stock market, but worked ok-ish last year.

Has anyone looked into roll yield optimised commodity ETFs (iShares ROLL and such)?

Mogul

@ Sparschwein – all excellent points. I’d add the volatility of an uncorrelated asset shouldn’t be a problem except that it may well be *psychologically*. The psychic scream that reverberates around Monevator when a major asset class has a bad few months never mind a bad decade makes me think that only a hardcore could live with an asset that inflicts years of misery before hitting pay dirt.

A losing position grinds people down. Sticking with it requires fortitude and faith. Interestingly, this is how Naseem Taleb used to trade and IIRC he struggled to convince his management that it would work.

I think I might take up your challenge on investigating the next generation of commodity ETFs. I’ve looked into commodities in depth but not written about it on Monevator. I kinda got the impression nobody was interested. Not that that normally stops me!

Three things have kept me out of commodities:

Underlying problems with commodity futures funds as you mention.

The balance of the academic research I read was against including commodities in a diversified portfolio.

I could use gold to do the job: low correlations with equities and bonds, no structural problem with using index trackers to gain exposure.

@TA – thanks, I think it’s worth turning every stone to find better diversification. It’s a real problem for anyone who is concerned about stock market risk. The dispersion of outcomes is huge even over the very long-term, when calculated without the usual biases (this podcast was quite the eye-opener https://rationalreminder.ca/podcast/224 ). Bonds too are less reliable in real terms than commonly thought.

Crude hedging with puts or VIX futures is just too expensive. If I had access to a good tail hedge like Taleb’s Universa, I’d go up to 90% in stocks.
There is probably a way to do this buying deep OTM puts and selling calls – figuring this out would be a full-time project for FIRE times…

“Cash would be a nice baseline to have in the table. I thought about doing it using some kind of money market fund or ultra-short bond ETF.”

You might find it reasonably easy to use the returns on Premium Bonds, either including or excluding the huge prizes.

There would be the complication of the tax-free nature of the returns.

Maven

I was about to post some smart arse remark along the lines of just bung it all in a global tracker, but just spotted that I did that in the comments from last year!

It seems odd that you have left out European equities. A bigger market than Japan, UK and global EM. Vanguard FTSE Developed Europe ex-U.K. Equity Index Fund or the ETF equivalent VERX would be suitable candidates. 10y annualised GBP returns 7.93% for the funds, 8.04% for the index, just below gold in your quilt.

ps ERNS for cash? Not the same, but reasonably close. 1.17% 10y annualised.

Maven

Interesting update, surely mid/long inflation linked bonds might have had good 10 year returns in 2021 but because of that and the deeply negative real interest rates they were incredibly unattractive, following the large falls of 2022 they are potentially moderately attractive..

Whilst mid/long US$ tips with 2%+ real returns going forward over the next few years may well turn out to be satisfactory.

Mogul

Thanks for the update @TA, and many thanks in particular for not including (as I’ve seen included in US $ versions of the 10 year quilt) BTC as a reference ‘asset’ in there. Nothing so muck irks me as the hypothetical returns I notionally ‘turned my back on’ because it was insanity squared 😉

There’s no pattern to returns from one year to the next across the asset quilt, but it is fair to say, I think, that over shorter periods (3, 6 or 12 month look back and 1, 3 or 6 month holding periods, with shorter holding periods for longer look backs) different assets do tend to show cross sectional (i.e. relative) momentum; and trend following funds like Winton do make money off of that, with returns often being negatively correlated with equities.

As (IIRC here) @Algernond has suggested in comments on other threads, trend following funds might be (in some sense, and within some limits) a ‘safer’ way to access broad commodity and/or gold exposure than a static allocation to either, albeit that the fees for these types of funds are little short of outrageous, especially as they’re quntative and rules based, and so don’t rely on active management/qualitative skill.

I’m now wondering how hard it would be to write, backtest and adjust the weighting of a Perl script to issue buy/sell instructions to run a DIY trend following fund.

Does anyone have a perspective on how frequently it would need to trade? I’m not desperate to have to write automated trading code.

@Aol — I agree. We’re sometimes asked why we don’t delete all the old comments when we update articles on Monevator — standard practice among many publishers to keep things looking fresh and certainly to reduce confusion — but your comment sums up why I usually leave them in place!

There’s whole bushels of old comments on Monevator that have a second life as a cautionary tale, or offer some other kind of lasting perspective. And a few retrospectively regrettable articles by myself, too, to be completely honest. 😉

I love looking back at old comments and laughing at my mistakes – for instance, my naughty play account sat idle(ish) in US T-bills during one of the best Santa rallies ever! Still up for 2023 though, as most seem to be.

Glad this is an annual feature now too.

Hi,

I’ve been looking to add the Royal London Short Duration Global Index Linked Fund R Acc to my portfolio, but the platform that I’m currently on (iWeb) only has the class M income version of the fund. Not ideal as I know the acc version of a fund is much more hands off if you are in the accumulation phase.

Regards,

Calum