Green Square

Well Allocated and Angry in 2013 – The Narrowness of Returns

If an economist or advisor suggested to you on December 31st of 2012 that your strategy for 2013 was going one 100% in Developed Market equities – in particular the S&P 500 – you most likely would have thanked them for their services and promptly fired them.  But in fact it would have been you they should have fired and stayed the course to what would end up being one of the best stock market returns in recent memory.

Of course no one would have been open to or advised to take such advice and so the misery that was a well diversified portfolio in 2013 was visited on many an investor.

Darrell Horn, founder of Chicago and Memphis based Green Square Capital recently reviewed what has been dubbed the “narrowness of returns” in his recent musing.

I have guest-posted it below

– Lincoln S. Ellis

The Narrowness of Returns      

2013 proved to be a good, yet frustrating year for investors who had diversified portfolios.  Returns were narrowly distributed among very few liquid asset classes, specifically developed market equities.  Adding to the frustration for investors and asset allocators, the US equity benchmarks are the largest and most followed liquid asset class across the globe.  Media coverage of these indices led investors wondering why everything wasn’t performing in line with US stock markets.  In this report we will dissect performance of major liquid asset classes, what drove performance and the impact on diversified portfolios.

Liquid Asset Classes

Each year we track performance of 16 major liquid asset segments and rank them in descending order from the best to the worst performers each year and create a periodic table.  The purpose of this is for us to understand which asset classes are contributing to performance and which were detractors across a spectrum of economic environments.  What is telling in this analysis is how the top and bottom performers change each year which supports the concept of asset allocation and diversification.

In 2013, liquid capital market returns were narrowly distributed with developed market equity segments dominating the return landscape.  For the year, developed market equities returned 30%.  The next best performing liquid asset class was high yield corporate bonds at 7.4% followed by senior secured loans at 5.29% and investment grade corporate bonds at 1.2%.  We have not experienced this degree of return concentration over the past 10 years as can be seen from the periodic table leading to frustration over diversified portfolio returns in 2013.

The narrowness of returns can also be illustrated by observing the average return of the best to worst performing liquid asset classes from 2004 to 2012 and comparing the distribution to 2013.  As can be seen in the chart below, the drop off in performance from the best to the worst in 2013 was dramatic resulting in a performance gap for non-equity asset classes and muted relative returns for diversified portfolios.                               

To further illustrate the narrowness of returns, we looked back over the past 10 years to determine how many of the 16 liquid asset classes produced positive performance versus the number that produced negative performance each year.  Between 2004 and 2013, an average of 13 of the 16 asset classes produced positive performance each year.  The big exception prior to 2013 was 2008 when only 6 of the 16 asset classes produced positive performance.  In 2013 8 of 16 asset classes produced positive performance.  Of these 8, 3 returned less than 1.25% for the year.  Other than 2008 and 2013, the worst year with respect to the number of asset classes that had negative performance was in 2007 when 13 of 16 asset classes contributed to performance.


In addition to only half of these liquid asset classes contributing performance in 2013, the magnitude of those contributors was well below trend.  In the following chart, we illustrate average performance under the assumption that an investor were to choose the best 8 and the worst 8 asset classes each year.  If an investor were lucky enough to choose the best 8 each year, the average performance of this mix would have been 18.6% per year over the past ten years.  If an investor were unlucky enough to have chosen the worst 8 asset classes each year, their performance would have been -0.7% per year over the past 10 years.  The average performance of all 16 assets classes was 8.5% per year for the past 10 years.

In 2013, the best 8 asset classes generated a positive return of 13.2% or 540 basis points below the long term average.  The 8 worst asset classes generated an average return of -6.5% or 580 basis points below the long term average.  The average return of all 16 asset classes was 3.3% or 520 basis points below the long term average.


2013 was an especially frustrating year due to concentrated performance in the most publicized liquid asset class.  The question at hand is whether this trend will continue or if 2013 was truly an aberration.  In our view, this trend will continue primarily driven by lower than trend returns in fixed income asset classes forcing capital allocators to look outside of the box at other sources of returns other than traditional allocations.  We will be addressing these issues in future reports.


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