Each year Mercer produces a “Periodic Table” of investment returns. The Table colour-codes 16 asset classes and ranks how each performed, on an annual basis, over the last 10 years.
A glance at the Table, with its scattered array of shades, quickly highlights how problematic it is to unearth patterns and contemplate what that may foreshadow for the future. Last year’s stars are at times a winner again the next year, and at other times sink to occupy the bottom ranks.
Looking across the past decade, several observations can be made:
- 2017 proved to be a strong year for financial markets. Every investment sector depicted generated a positive return – not a common event but the second year in a row for this to occur.
- All asset class returns in 2017 fell within a top-to-bottom range of 33%. This is below the annual average for the past 10 years (37%) but above 2016’s exceptionally tight range (11%). The highest range was 65% in 2008 as the Global Financial Crisis reached full force.
- Emerging Market Equities led the way by a clear margin in 2017, returning 35%, following several years of more mediocre returns. New Zealand Equities continued their impressive run, placing second, just ahead of Developed Market Equities.
- The mantra “cash is king” has not held true over the last 10 years. In fact, the asset class took out bottom spot in 2017 in a repeat of the prior year’s outcome. However, Cash is the only asset class in the Table, along with Global Aggregate Bonds, to have recorded a positive return in every calendar year.
- After a strong 2016, Commodities barely broke into positive territory last year. This placed it into more familiar territory, having ranked in the bottom two asset classes in six of the last seven years.
- Two asset classes typically categorised as “alternative” are Fund of Hedge Funds and Global Private Equity. The former has followed a fairly steady return path, averaging 4% per annum (net of fees), while the latter has averaged a healthy 13% per annum (also net of fees) and benefited those investors with higher risk and illiquidity tolerance.
- Across the decade, the award for single highest annual return remains with Emerging Market Equities (43% in 2009) and the lowest with Global Listed Property (-44% in 2008).
One can while away the hours making additional observations from the Table, and perhaps identify patterns – real or illusory. However, the unpredictable nature of capital markets is a recurring theme, reminding us of the merits of diversification and a focus on the longer term. Such sentiments are particularly relevant as we experience the heightened volatility of early 2018. While a “three-peat” of a full set of positive asset class returns is perhaps a brave bet for the year ahead, of more consequence is structuring portfolios to withstand a variety of market conditions.