November: Best and Worst Asset Classes
Nov/15/08 11:41 PM
What asset classes are winning in 2008 as of
Saturday, November 15th?
1) +7.07% - Domestic Intermediate Treasuries (ITE)
2) -1.78% - Tax Free Municipal Bonds (MUB)
3) -5.00% - Domestic Treasury Inflation Protect Securities (TIPS)
What asset classes are losing in 2008 as of Saturday, November 15th?
1) -54.66% Emerging Market Equity (EEM)
2) -59.82% International Listed Private Equity (PFP)
3) -64.95% Domestic Listed Private Equity (PSP)
How are the broad markets as of Wednesday, November 15th?
Domestic: Stocks (SPY): -39.21% and Bonds (AGG): +.50%
International: Stocks (EFA): -46.64% and Bonds (BWX): -5.00%
Emerging Market: Stocks (EEM): -54.66% and Bonds (EMB): -14.82%
Our Comments: The US stock market continues to be one of the best performing markets around the globe. It’s sad to say, but down 39% is actually good compared to the global equity markets. The big surprise in the last few months is how correlated all asset classes have become. To be up this year you really had to be in cash, treasuries or short the market. Despite all the infomercials on TV even gold is not up this year. Stay invested and stay diversified.
1) +7.07% - Domestic Intermediate Treasuries (ITE)
2) -1.78% - Tax Free Municipal Bonds (MUB)
3) -5.00% - Domestic Treasury Inflation Protect Securities (TIPS)
What asset classes are losing in 2008 as of Saturday, November 15th?
1) -54.66% Emerging Market Equity (EEM)
2) -59.82% International Listed Private Equity (PFP)
3) -64.95% Domestic Listed Private Equity (PSP)
How are the broad markets as of Wednesday, November 15th?
Domestic: Stocks (SPY): -39.21% and Bonds (AGG): +.50%
International: Stocks (EFA): -46.64% and Bonds (BWX): -5.00%
Emerging Market: Stocks (EEM): -54.66% and Bonds (EMB): -14.82%
Our Comments: The US stock market continues to be one of the best performing markets around the globe. It’s sad to say, but down 39% is actually good compared to the global equity markets. The big surprise in the last few months is how correlated all asset classes have become. To be up this year you really had to be in cash, treasuries or short the market. Despite all the infomercials on TV even gold is not up this year. Stay invested and stay diversified.
Important lecture by head of Yale's Endowment
Nov/07/08 07:34 AM
David Swensen has been the investment manager of Yale's Endowment since 1985 and is known as one of the best investors of our time. He recently was a guest lecturer at one of Yale's economics classes and the lecture is posted online.
Our investment process is largely based on the "Yale Model" of investing and I believe you will find his thoughts reassuring and educational.
Click here to watch Swensen's lecture at Yale.
Individual investors have refused to globalize.
Aug/23/08 01:35 PM
Retail investors’ behavior is not reflective of the
current global landscape. According to Hewitt
Associates’ 401k data for 2007, retail investors were
only allocating 14% of their equity portfolios to
international investments. This contrasts starkly
with the current US portion of global market cap and
global GDP. Unlike retail investors, institutional
investment activity clearly reflects awareness of the
rapid expansion occurring outside the US.
I heard Paul Wolfowitz, former head of the World Bank, lecture on this topic several years ago. At the time, Mr. Wolfowitz pointed out that in 25 years the US portion of global market cap would shrink from roughly 50% to 25%. He also outlined that this trend began to accelerate in the 1970s (at that time US markets made up 66% of global market cap). What troubles me is that institutional investors like Harvard and CalPERS have increasingly moved their equity allocations in line with this global market cap shift. Unfortunately, individual investors who are increasingly more responsible for their own investment decisions (as DC plans overtake DB plans) are showing no signs of adjusting to this trend. This could prove to be a costly mistake.
According to the MSCI Blue Book, in 1970 the US public equity markets made up of 66% of global market cap. We recently ran a simulation using S&P 500 (SPY), MSCI EAFE (EFA) and MSCI EM (EM) Indexes to test how investors would fair if they had kept pace with globalization. We began the simulation in 1970 with 60% invested in the S&P 500 and 40% in the MSCI EAFA index. In 1988 we shifted the portfolio to be 40% the S&P 500, 40% MSCI EAFA and 20% the MSCI EM index to reflect the shrinking global landscape. Rebalancing annually, this global portfolio averaged a return of 11.71% vs. 10.50% for the S&P 500 over the same period.
The case for retail investors to move to a global portfolio is a case for improving their returns. Since 1970 the rate of real GDP growth has slowed in the US. This is also reflected by a US public equity market that has seen its growth rate slow post-1970. This is exactly why institutions are increasingly moving toward global equity mandates. The risk to US retail investors is that they may see investment returns significantly below previous generations. This does not bode well for those investing for retirement today.
Disclosure: The author’s firm has positions in SPY, EFA, and EEM.
I heard Paul Wolfowitz, former head of the World Bank, lecture on this topic several years ago. At the time, Mr. Wolfowitz pointed out that in 25 years the US portion of global market cap would shrink from roughly 50% to 25%. He also outlined that this trend began to accelerate in the 1970s (at that time US markets made up 66% of global market cap). What troubles me is that institutional investors like Harvard and CalPERS have increasingly moved their equity allocations in line with this global market cap shift. Unfortunately, individual investors who are increasingly more responsible for their own investment decisions (as DC plans overtake DB plans) are showing no signs of adjusting to this trend. This could prove to be a costly mistake.
According to the MSCI Blue Book, in 1970 the US public equity markets made up of 66% of global market cap. We recently ran a simulation using S&P 500 (SPY), MSCI EAFE (EFA) and MSCI EM (EM) Indexes to test how investors would fair if they had kept pace with globalization. We began the simulation in 1970 with 60% invested in the S&P 500 and 40% in the MSCI EAFA index. In 1988 we shifted the portfolio to be 40% the S&P 500, 40% MSCI EAFA and 20% the MSCI EM index to reflect the shrinking global landscape. Rebalancing annually, this global portfolio averaged a return of 11.71% vs. 10.50% for the S&P 500 over the same period.
The case for retail investors to move to a global portfolio is a case for improving their returns. Since 1970 the rate of real GDP growth has slowed in the US. This is also reflected by a US public equity market that has seen its growth rate slow post-1970. This is exactly why institutions are increasingly moving toward global equity mandates. The risk to US retail investors is that they may see investment returns significantly below previous generations. This does not bode well for those investing for retirement today.
Disclosure: The author’s firm has positions in SPY, EFA, and EEM.
Earth to Global Inflation
Jun/23/08 09:19 AM
Capital Economic provides us with some research and they sent us an interesting piece on how the resurgence of global inflation is raising fears of a return to the 1970s. They point out that the good news is that, there is little sign of commodity-led inflation becoming embedded in the economy via wage and price-setting behavior. With economic activity weak and labor markets softening, households will find it very hard to secure higher wage increases to compensate for higher prices.
This is good and it should allow the supply and demand responses to eventually bring commodity prices back down to earth.
Important Disclosure