Asset allocation quilt – the winners and losers of the last 10 years

It’s duvet day here at Monevator as we update our asset allocation quilt with another year’s worth of returns.

The resulting patchwork reveals the fluctuating fortunes of the major asset classes across a decade and invites a question…

Could you predict the winners and losers from one year to the next?

Asset allocation quilt 2023

The asset allocation quilt ranks the main equity, bond, and commodity sub-asset classes for each year from 2014 to 2023 from the perspective of a UK investor who puts Great British Pounds (GBP) to work:

• We’ve sourced annual returns from publicly available ETFs that represent each sub-asset class.

• The data is courtesy of justETF – an excellent ETF portfolio building service.

• Returns are nominal. To obtain real annualised returns, subtract the average UK inflation rate of approximately 3% from the nominal figures quoted in the final column of the chart.

• Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.

• Again, these are GBP results. If our numbers differ from yours, check that you’re not looking at USD returns. (It’s either that or our minds have been obliterated from staring too long at the crazy pixel explosion above.) 

Sanity check

While our chart may look like the worst pullover pattern ever, it does offer some useful narrative threads.

For a start, investing success is not as simple as piling into last year’s winner. A reigning number one asset has only once held onto its crown for two consecutive years – broad commodities achieving the feat from 2021 to 2022. 

But in 2023? Commodities plunged straight to the bottom of the table after two years at the top.

Yet long periods of dominance holding very near the top of each year are possible – see US equities. S&P 500 returns have only dropped into the bottom half of the table once in the past decade (in 2022).

The danger is this pattern gulls us into thinking it will always be thus. Yet the asset allocation quilt for 1999 to 2008 would have looked very different.

US stocks lost 4% per annum during that ten-year stretch. I suspect the S&P 500 was a touch less popular back then.

Mean reversion is not a law though. America could continue to rule the equity roost for years to come. Credible voices suggesting we can’t expect US large caps to keep defying gravity have been whistling in the wind for years.

The golden thread

Gold looks attractive as the leading non-equity diversifier. But its third-place ranking in the 10-year return column reveals that even a decade worth of returns can mislead. 

The same column last year placed gold in 8th, barely scraping a positive real return. In 2021, gold was second from last. 

What happened? The yellow metal’s 2013 poleaxing (-30%) dropped out of the picture, that’s what. Gold then floated up the rankings as that annus horribilis was replaced with a creditable 2023 performance. 

While it’d be wonderful to reliably avoid such market firestorms, how is that to be done? 

For example, 2022 was a terrible year for nearly everything, whereas 2023 was a real shot in the arm for global equity investors. 

Did you really feel any better about the world’s prospects in 2023 versus 2022? 

The truth is 2023 looked grim too from an investing perspective until a massive Santa rally saved the year. 

The message is that investing returns are often hard won. Pain goes with the territory. 

A chequered past

A particularly awful year or two can completely alter our perceptions of an asset class. 

10-year bond returns were perfectly satisfactory back in 2021. But the bond crash of 2022 will poison the well for years to come. 

Bonds now look like a liability by the light of the last ten years. Yet higher yields are almost certain to deliver better returns from bonds over the next decade, provided inflation is tamed. 

That said, much as I think bonds should be part of a diversified portfolio, I don’t think they’re enough as 2022 demonstrated. 

Commodities can guard the portfolio against fast-rising inflation, which bonds and equities can’t cope with. 

 But you’ll need testicular fortitude to live with the volatility of raw materials.

They’ve inflicted losses for six out of the last ten years, but redeemed themselves with spectacular 30%+ gains on three occasions. Most critically, when inflation lifted off in 2021 and 2022. 

Note how commodities fall away as inflation subsides in 2023. A pattern that’s regularly repeated over commodities’ longer-term record as a ‘sometimes’ inflation hedge. 

If you don’t think we’re done with inflation yet then commodities make sense. 

The missing link 

Inflation-linked bonds make sense too, but not the flawed mid to long duration funds that failed so badly in 2022. 

A partial solution is choosing a short-term linker fund such as the Royal London Short Duration Global Index Linked fund. Its 5.5% annual return would bag it 7th place in our asset allocation quilt’s 2023 column.

It would have placed 5th in 2022 with a -5.4% return. That’s not stellar but was a sight better than nominal gilts or longer duration inflation-linked bond funds. 

The real solution is to hedge inflation with individual UK index-linked gilts which – if held to maturity – will protect your purchasing power against headline inflation. 

We’ve recently written about how to do that: 

• See the Using a rolling linker ladder to hedge unexpected inflation section in our post about deciding whether or not you need such a ladder. 
• Then see our step-by-step guide to constructing your own index-linked gilt ladder if you do want to do it yourself. 

Stitch in time 

However you weave your response to the challenges of investing, the asset allocation quilt makes it plain that the best way to anticipate the future is to be ready for anything. 

Buy your asset classes on the cheap after they’ve taken a kicking, grit your teeth while they’re down, then reap the reward when their day – or year – comes around again. 

Finally, as uncertainty abounds, let’s be thankful that if you banked on the default position of global equities then you did just fine. In fact, more than fine over the last decade.

That near-8% annualised real return is excellent.

Take it steady,

The Accumulator