As we kick off the first days of 2019, we can take a look back at the performance of global asset classes and alternative investment styles to tally winners and losers in terms of 2018 total returns. Overall, 2018 brought back significant volatility for global equity markets, particularly when compared to the past few years. While U.S. equity indices remained flat to only slightly negative throughout much of the year, Q4 brought a spout of nearly unprecedented downside volatility, throwing many U.S. indices deep into the red. International and emerging market equities also experienced declines in Q4, furthering their slide throughout what can be characterized as a tumultuous year. While the risk-off trade this year was most widely noticed across global equity markets, they were far from the only asset classes to post declines throughout the year. More specifically, Figure 1 set forth below displays the 2018 performance for the common asset classes held in most Traditional Portfolios and along with those of common alternative investment approaches.
Figure 1: 2018 Returns for Traditional Asset Classes & Common Alternative Strategies
(Source: Norgate, Barclays, AQR, Societe Generale, and Morningstar)
As one can observe in the chart above, returns have simply been hard to come by in 2018 – and that’s taking the view of the glass being half full. The steady increase in interest rates has put downward price pressure on U.S. Treasuries and bonds globally. At the same time, many commodities such as oil and gold have also seen headwinds. Moreover, common alternative strategies such as Trend Following and Long/Short Equity, which have a tendency to do well in higher volatility environments, have also experienced poor performance in the period analyzed. We believe this is a result of many markets remaining range-bound and directionless while also exhibiting tendencies for quick, precipitous declines and reversals throughout the year. While our experience and research shows that these market dynamics don’t typically last for extended periods of time, they do pop up every so often, creating tremendously difficult environments for investors and traders alike.
Further detailing the struggle to generate returns in 2018, Deutsche Bank released an interesting data snapshot that illustrates the percentage of asset classes exhibiting negative returns by year, going back over 100 years to 1901. As depicted in Figure 2 below, the past two years have produced two very interesting outlier data points. First, 2017 was very much an outlier year for positive returns, as only 1% of asset classes posted a negative return, which had never been seen over the prior 117 years. Second, based on how 2018 was shaping up (results displayed in Figure 2 are through mid-November), we see the extreme on the opposite end of the spectrum where 90% of the asset classes measured had negative returns, the highest percentage in history. (Note: 90% is likely a conservative estimate now, as several U.S. equity indices remained in positive return territory in mid-November but slid substantially in the last six weeks of the year.)
Figure 2: Percentage of Asset Classes Posting Negative Returns: 1901- Nov. 2018
(Source: Deutsche Bank, Bloomberg Finance, and GFD)
So why was 2018 such a tough year to find returns? We could point to some of the recent headwinds seen throughout the U.S., including increasing interest rates, concerns regarding economic growth, and a geopolitical environment that was unfavorable for global trade and international relations. We can also point to the general tightening of monetary policy by central banks around the world, as they are beginning to unwind their balance sheets in fairly material ways. While it’s always a challenge to pinpoint the exact culprit (although the media tries quite hard), it’s important to monitor and objectively interpret the data as we move forward. At RQA, we take an evidence-based, systematic approach to investing, as it allows us to remain objective about the markets and alleviate any psychological pitfalls that many succumb to in more difficult market environments – like the current environment. As we make our way forward, we maintain our view that the best thing any investor can do is to seek out maximum portfolio diversification (i.e. multi-dimensional diversification) paired with rigorous risk management that’s geared towards protecting portfolio capital against outlier downside scenarios.
Disclaimer: These materials have been prepared solely for informational purposes and do not constitute a recommendation to make or dispose of any investment or engage in any particular investment strategy. These materials include general information and have not been tailored for any specific recipient or recipients. Information or data shown or used in these materials were obtained from sources believed to be reliable, but accuracy is not guaranteed. Furthermore, past results are not necessarily indicative of future results. The analyses presented are based on simulated or hypothetical performance that has certain inherent limitations. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight.