Topic Tags: Asset Allocation

Why is Portfolio Diversification Important?

This week’s Chart of the Week shows what is commonly referred to as a “Periodic Table of Investment Returns”. It is a table showing historic calendar year returns for various asset classes ranked in order of performance from best to worst. One of the key takeaways from this table is that 2015 was a particularly challenging year for investment returns.

This week’s Chart of the Week shows what is commonly referred to as a “Periodic Table of Investment Returns.” It is a table showing historic calendar year returns for various asset classes ranked in order of performance from best to worst. One of the key takeaways from this table is that 2015 was a particularly challenging year for investment returns. With the exception of real estate, there were no major asset classes that posted double-digit gains in 2015, and except for emerging market equities, there were no major asset classes that posted double-digit losses for the year. In an environment where most asset classes posted low single-digit returns for the year (either positive or negative), it was extremely difficult for diversified portfolios to achieve their target rates of return in 2015.

The other key takeaway from this table is the importance of diversification within a portfolio. As seen in the table, there has been very little consistency in the best and worst performing asset class from year to year. In fact, since 2007 just about every asset class that was the best performing asset class for a year was also the worst performing asset class for a year during this time frame. Just because an asset class performs well in one year it will not necessarily perform well the next, and just because an asset class performs poorly in one year it will not necessarily perform poorly again the next. This illustrates the importance of adhering to strategic asset allocation targets and rebalancing portfolios back to targets over time.

1Represents YTD return as of 9/30/15.  4Q 2015 returns are not yet available.
2Represents YTD return as of 11/30/15.  December 2015 returns are not yet available.

Asset Class Benchmark
Large Cap Russell 1000
Mid Cap Russell Mid Cap
Small Cap Russell 2000
Core Fixed Barclays US Agg Bond
High Yield Barclays US Corporate High Yield
Bank Loans Credit Suisse Leveraged Loan
Developed Lg Cap MSCI EAFE
Developed Sm Cap MSCI EAFE Small Cap
Emerging Markets MSCI EM
Real Estate NFI
Hedge Funds HFRI FOF: Diversified Index
Private Equity Cambridge All PE

High Yield: Where Do We Go From Here?

December 2015 Investment Perspectives

The recent sell-off in the high yield markets caught many investors by surprise, and has emerged as a primary concern as the year comes to an end. Given the magnitude of the sell-off, it is fair to ask if more bad news is to come from the high yield market and if investors should reduce their allocations to the asset class before year-end. The following newsletter examines the recent market drop and offers perspective on future prospects for the asset class as well as considerations for investors with allocations to high yield.

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2015 Investment Symposium Briefing

This video summarizes Marquette’s 2015 Investment Symposium on October 16, 2015, including the opening sessions and flash talks, which covered the current market environment, emerging investment themes and investment stewardship challenges in the year ahead. The new flash talk session format is designed to brief attendees on more popular topics in less time and encourage timely conversations with investment consultants.

Flash talk sessions discussed:

 

How to Position Fixed Income Portfolios for the Rate Hike

October 2015 Investment Perspectives

Much has been written and discussed in the media about when the rate hike will begin and the pace at which it will occur. Ultimately, the timing and pace are difficult to predict because they depend on many moving parts, including unemployment, inflation, and a host of unpredictable economic and political factors. The right question to ask is: How should an institutional investor position a fixed income portfolio for the rate hike, regardless of the associated timing and speed?

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How Have Capital Market Valuations Evolved Over the Last Year?

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

Japanese Government Bonds and German Bunds are some of the most expensive debt instruments currently available to investors. As it relates to the former, the Bank of Japan’s unprecedented stimulus has helped push Japanese Government Bond yields to record lows, and earlier this year, yields on securities with maturities up to five years turned negative for the first time. Looking ahead, the Fed’s willingness to delay an increase in U.S. interest rates should support demand for riskier assets and as a result, fixed income valuations may normalize over time. Compared to last year, the most precipitous drop in valuations has taken place in U.S. High Yield, U.S. Credit and U.S. dollar-denominated Emerging Markets Debt.

As it relates to equities, with the exception of the U.S., South Africa, and Mexico, valuations around other parts of the globe are on the lower end of their historical averages.  Finally, valuations in Canadian, Spanish, and Taiwanese equity markets have come down the most over the past year as these markets have sold off over the near term.

Note: Percentile ranks show valuations of assets versus their historical ranges. Example: If an asset is in the 75th percentile, this means it trades at a valuation equal to or greater than 75% of its history. Valuation percentiles are based on an aggregation of standard valuation measures versus their long-term history.

CAPEX Cuts Continue in the Energy Industry

As oil prices oscillate around $40, market participants continue to wonder how long these low prices will persist. The decline in oil prices, due in part to strong supply growth and lower-than-expected demand growth, has caused headaches for many in the energy industry.

As oil prices oscillate around $40, market participants continue to wonder how long these low prices will persist. The decline in oil prices, due in part to strong supply growth and lower-than-expected demand growth, has caused headaches for many in the energy industry. Energy companies have made cuts to their CAPEX (capital expenditure) levels and canceled future expansions to reduce spending and maintain low costs. This week’s chart examines the Baker Hughes United States Crude Oil Rotary Rig Counts. Rotary rig counts are often included as an input when analyzing future oil prices — the logic is that a decline in rig counts foreshadows a reduction in supply, and a rise in rig counts precipitates an increase in supply.

Since peaking in October 2014, rig counts have fallen by 60% to the lowest level in over five years. Rig counts saw 29 consecutive weeks of decline between December 2014 and June 2015. The rig counts appeared to consolidate and even ticked up after that 29-week period, with 54 rigs joining the count over a period of 8 positive weeks. This led many investors and market participants to project a continuation of downward pressure on oil prices due to the expected additional supply as a result of the added rigs. However, CAPEX cuts continue in the energy industry, as 42 rigs have come offline since the end of June (with the majority coming offline in September), almost completely reversing the effects of the increase seen in July and August. For investors and market participants, the data suggests that a bottom is forming in the rig counts and energy companies may be nearing the end of their CAPEX cuts. Whether or not this translates into an increase in oil prices remains to be seen.

U.S. Equity Market Update

August 2015 Investment Perspectives

Over the last week, the U.S. equity market – as represented by the S&P 500 Index – declined 11% between August 17th and 25th. The pace and magnitude of the market drop have come as a shock to many and left investors pondering how they should react to this swift downdraft. The following article is intended to provide some perspective on the recent volatility as well as some guidance for our clients on how to respond to the recent sell-off.

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