Not all asset classes appreciate at the same rate. Some have made you very little money for the past ten years, even taking into account dividends, while others have returned multiples of the original investment as shown below.
The chart above shows the total returns from a variety of markets or asset classes which would have accrued to a sterling investor over the past ten years. This underlines the importance of taking currencies into consideration when making asset decisions.
In general, there is no guaranteed way to choose the asset class which is going to produce the best returns over the coming years, but we believe that the younger, Pacific-centric economies are likely to grow further and faster than the old, Atlantic-centric ones. There is a young and dynamic population of over 2,500 million in this region who will eat more, consume more manufactured goods and use more energy. They will want a steadily-rising standard of living and will work hard to earn it. We believe that these markets are the markets of the future and, over the long-term, our global asset allocation approach favours the Pacific-centric markets, certain commodities and global property.
Whilst the chart above enables one to understand intuitively the importance of the asset class decision – it doesn’t really matter which column is which, the crucial point is that the outcomes for each were very different proving that asset choices in a portfolio would have made a huge difference to investment returns over the ten year period.
Many have approached this question from an academic angle and many studies have been carried out and published on the subject over the past 30 years. Below is a selection of the findings from studies covering a range of underlying geographies and fund types.
Studies demonstrating the importance of Asset Allocation
The results are unequivocal and clearly demonstrate the importance of asset allocation. It may seem strange to see that Asset Allocation has accounted for more than 100% of long-term return in most cases, but this reflects the impact of the higher underlying costs associated with the ‘active’ or stock-picking element of the investment decision which detract from long-term returns.
