“Periodic table” for investment shows case for diversification

The latest “periodic table” of investment returns – which ranks the performance of key equity and credit indices over two decades – from Callan Associates reinforces a lasting rule for long-term investors: diversification works.

By ranking the returns of eight major equity and credit indices across the globe, the table shows the uncertainty inherent in all capital markets by listing the turnover of the best-performing indices of each year from 1990-2009.

This includes the long-running phases of capital markets, such as the strong outperformance of US large-caps in the five years to 1999, when the US equity market enjoyed one of its strongest five-year runs, followed by their lagging performance from 2000-2006.

Following the dotcom crash, large-caps fell from 2000-2002, declining in consecutive years for the first time since the crash of 1929-32. From the market peak of March 2000, the S&P 500 suffered its largest fall since 1974, shedding 40 per cent until the end of 2002.

Equity markets then rallied for five years, driven by strong growth in non-US markets, before collapsing again, falling by 37 per cent in their second-worst annual decline since 1926.

This was when bond markets shot to the lead, with no great improvement in performance after ranking last in four of the five previous years, by returning 5.24 per cent for 2008, before falling to last place in 2009, with a return of 5.93 per cent, as equity markets rallied.

In its commentary on the table, the asset consultant notes that the modest return of the Barclays Capital Aggregate Bond Index (BC Agg), the only credit index listed in the table, disguised the vastly divergent performance of its segments. While US Treasury’s fell 3.6 per cent, bringing the government component of the index down 2.2 per cent, corporate bonds rebounded sharply from their 4.9 per cent loss in 2008 to gain 18.7 per cent. The mortgage-backed component of the index rose to 5.9 per cent, supported by ongoing intervention in the mortgage market by the US Federal Reserve.

Even though high-yield bonds are not included in the BC Agg, the wild turnaround in their performance was staggering, Callan notes: after plummeting 25 per cent in 2008, they soared 58 per cent in 2009.

Some other interesting trends in the relative performance of market segments can also be observed. In 2009, for the ninth year out of the last 11, small-cap equities beat large-caps, returning 27.2 per cent against 26.5 per cent. In both the small- and large-cap markets, growth equities outperformed value.

The indices featured in the table, which can be downloaded here, were:

S&P 500 Index

S&P/Citigroup 500 Growth and S&P/Citigroup 500 Value Indices

Russell 2000 Index

Russell 2000 Value and Russell 2000 Growth Indices

MSCI EAFE

BC Agg